The Australian alternative finance (Alt-Fi) market is booming, and if there’s a category leading the charge it’s Peer-to-Peer (P2P), or marketplace lending.
In 2017, the Australian Alt-Fi market grew by 53%, making it the second largest Alt-Fi market in the Asia Pacific. Figures from 2016 showed P2P – combining personal lending, business lending and real estate lending – made up 57% of the entire Asia Pacific Alt-Fi market.
So what is P2P? How does it work? And why are both investors and borrowers increasingly looking to P2P as part of their investment strategy or to meet their funding needs?
What is P2P or peer-to-peer lending?
P2P (or peer-to-peer lending) is an online marketplace, bypassing the traditional credit providers (banks, building societies or credit unions) by directly matching investors, who become the “funders”, and borrowers.
Funding comes from investors, who can be individuals or entities, and can be used by borrowers for a variety of reasons, including personal loans, business funding, or property construction or development.
Traditionally, if a business or consumer needed a loan, they would turn to the banks and keep their fingers crossed, with few secure alternatives if the loan was declined. P2P launched in Australia in 2012 and there are now many different P2P lenders offering an alternative to banks for a range of borrower and loan types.
There are lots of options when it comes to selecting a P2P marketplace. Some focus on smaller value consumer lending, some on larger value business lending. Some P2P lenders offer secured lending while others offer unsecured lending. Essentially, not all P2P lenders are the same – there are lots of variations to suit different needs – so it’s worth doing some research to understand the different options available.
Key questions to ask when comparing P2P options:
- Is the lender licensed?
- What licenses do they hold?
- What is the target market – consumer, business, property or other lending?
- How are investments structured, for example, does the platform pool funds with others?
- How transparent is the P2P platform with their rates, fees and terms?
- For a borrower, what are the interest rates and fees associated with the loan?
- For an investor, what are the likely returns and ongoing fees?
How do I get a P2P loan?
The next step to get a P2P loan is to register as a borrower or an investor on the P2P platform. While the online registration process tends to be relatively simple, security is a key part of the process for most P2P platforms.
This includes ID checks and full compliance with many of the same requirements as banks, including Anti-Money Laundering and Counter-Terrorism Financing.
As with any application through a traditional funding channel, borrowers on P2P platforms also have to undergo a credit assessment which contributes towards determining borrower rates and investor returns.