As with all financial decisions you will make in your life, there are many options and not all of them will be the right fit for your goals and lifestyle. Depending on your individual situation, many factors like your income, your credit rating and your propensity for taking risks, will indicate whether investing with the peer-to-peer model or traditional bank deposits are the best fit for you.
Peer-to-peer (P2P) is a two-sided arrangement between everyday people. One person wants to borrow money and one person wants to invest/lend money. The transaction is managed by loan managers like Southern Cross Partners (SCP) who takes care of all the correspondence with the borrower, meaning the lender – who we will call the investor - and borrower never interact with each other and each of their best interests is balanced by SCP. The main appeal of P2P is that investors can get a higher interest rate and borrowers can obtain finance for their loan that perhaps a bank has declined - it’s a win-win.
Banks are traditionally the avenue borrowers go down when seeking out a mortgage loan. However, there are a number of reasons why bank loans might not be suitable - for example, perhaps they aren’t able to borrow from the bank due to previous financial missteps that have affected their credit rating or they are a business owner without the latest financial accounts
Similarly, there are a number of reasons why investors might be more inclined to invest their money in P2P lending rather than in a term deposit with the bank, as P2P can often mean a higher return on investment at above-market interest rates.
Let’s break down the pros and cons of both options for borrowers and investors alike.
Peer to Peer vs. Traditional Lending for Investors
Higher Interest Rates
The main benefit to investing in P2P lending is the higher interest rates. At SCP we offer the chance to invest in short-term mortgages with current interest returns of 4.00% to 7.00% per annum* where you can receive monthly interest payments *rates subject to change.
Our minimum investment at SCP is $50,000, so if you are someone with a smaller amount to invest, a bank term deposit may be a better option for you. Many New Zealand banks offer minimum investments of as little as $2,000.
P2P is Regulated
It’s easy to assume that P2P lending isn’t as regulated as lending provided through traditional banks. However since 2014, peer-to-peer lending services have been required to be licensed after changes were made in the Financial Markets Conduct Act 2013, so you can be assured that SCP is licenced to provide these lending services.
As with any loan, there is always the possibility that the borrower (individual, group or business) may not be able to pay back the loan in full.Given the thorough checks SCP has in place to ensure borrowers are financially stable and able to make their mortgage repayments on top of their existing financial obligations we have a low occurrence of this happening. You can view our default rates on our website here.
However, should the worst happen and the borrower is unable to make repayments, all of SCP borrowers' loans are backed by property security with a registered first mortgage allowing us the means to recover the loan amount. Further information about the mortgagee sale process is on our website here.
A Skilled Team Handles Your Investment on Your Behalf
Here at SCP, you will have a dedicated team who is in direct communication with the borrower and can deal with any problems that may arise and reach a solution without you ever having to get in touch with the borrower yourself. Everything is managed by us and most of the time, issues are resolved easily.
If we're unable to reach a resolution with the borrower and they aren’t able or willing to make due repayments, we may elect to make up any shortfall. If we do this, your payments will continue, unaltered, and we will collect any shortfall payments from the borrower. If we elect to not pay you the shortfall, you will be entitled to a portion of whatever default interest we collect on your portion of the loan, for the period that your investment payments are in default.
Free Choice in Where You Investment
Being able to choose exactly where your funds are invested such as location and the loan-to-value ratio can ensure you get the investment that best suits your investment risk profile and investment strategy.
Our team is able to provide you with information about each investment to ensure you make an informed choice. Whether you’d like to invest everything in one loan or spread it over several different loans the choice is completely yours.
The Option to Withdraw Funds Early
If there is a chance you might want to withdraw your investment early, you would need to think carefully about the term you invest for. Traditional term deposits have some penalties and waiting times imposed on early withdrawals. Similarly, when you invest via P2P with SCP, your investment is locked with us until the loan repays. However if you end up in a situation where you need your investment back before maturity, you could sell your loan to other investors through our Secondary Market service. There may be a small fee payable but you will receive all your accrued interest up until the funds are repaid to you.
An unlikely but possible risk of investing with a P2P lender is that SCP mismanages the business, and as a result, causes the business to fail. Fortunately, we're prepared for this situation, as the mortgage security and any funds associated with it, are kept separate from Southern Cross Partner’s business activities, in a Trust Company.
In addition to this precaution, we have a formal agreement with another experienced finance provider, who will take over the management of the business, to continue to collect and pay your interest from the borrower, and (when the loan repays), collect and repay your investment principal.
The Verdict?
Investing in a term deposit could be a more suitable option for people who don’t have an appetite for risk. The likelihood of losing money through defaulted payments via a bank term deposit is very minuscule and New Zealand banks are among the strongest in the world. If you’re a conservative investor who doesn’t like to take too many risks, then the bank might be the way to go - but if you’re looking for an investment option to maximise your returns then P2P could be the one for you.
Because of the rise in popularity of the P2P model, investors may not be able to invest straight away - there may be a waiting period where SCP is trying to find suitable borrowers for your investment. So if you’re keen to get the ball rolling and want to start seeing those returns come in, this is something to bear in mind.
Peer to Peer vs. Traditional Lending for Borrowers
Flexible Lending Solutions
For borrowers, an important benefit to consider when tossing up P2P or a bank loan is that borrowers have access to perhaps more flexible solutions with P2P lending than they would with a traditional bank loan.
Builders, developers and investors often look for lending solutions that are more flexible from a lender that understands their requirements.
As we noted in our recent blog, the uncertainty of the stock market has caused an increase in inquiries in the P2P investment sector, as investors search for alternative investment options
If you are a borrower in need of a flexible loan solution, jumping through hoops at the bank may not be what you need right now if your past circumstances has affected your ability to be accepted for a loan at the bank, P2P may be a good alternative to explore.
Flexible Interest Rates
It’s important to note that even though P2P investors are more flexible with borrowers’ who may not have shining credit ratings, they still take those ratings into consideration when offering you an interest rate. So while you may be more likely to be accepted for a loan with a P2P platform, the interest rate you are offered may still be reflective of your financial history.
Typically More Investors than Borrowers
The good news at the moment for borrowers’ is that there are typically more investors than borrowers, so it’s very likely your application will be able to be funded relatively quickly, depending on the circumstances.
So if you are a borrower having a hard time securing a loan elsewhere, get in touch with one of our team members today to discuss your situation. We may be able to assist!
For more information on P2P lending, here are some of our other resources:
If you have any questions or would like to learn more, get in touch with one of our advisers, today.
