Peer to Peer Lending
What are the returns, and is your money safe?
Updated January 2018
TLDR Review Summary of
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Peer to peer lending
Peer-to-peer (P2P) lending has become something of an underground sensation among investors and borrowers alike. The idea is simple - Kiwis with spare money help other Kiwis looking for a short term loan with low fees and interest rates. The loans are then managed by websites, acting as online platforms, which (somewhat) cut out the middlemen and embrace the “sharing” economy. Firms like Harmoney and Squirrel Money have seen a surge of transactions as people look for lower lending rates and higher investment returns; lenders are told they can receive returns of 8 to 12% per annum while borrowers are lured in with bank-beating personal loans.
Peer to peer lending can work well as a long term investment, but before you go all in on this hybrid form of saving, it’s essential you understand how peer to peer lending works as well as its risks and limitations.
This is a complete guide to the best peer-to-peer lenders in New Zealand, explaining how the platforms works, how the industry is regulated, what the risks are and how the different players compare. Beyond this page, we've reviewed P2P leaders Harmoney and Squirrel Money separately to provide a complete guide to their offering for investors and borrowers.
The Financial Markets Authority regulates peer to peer lending, and only companies on the New Zealand approved peer to peer lender list can offer such investments.
Peer-to-peer (P2P) lending has become something of an underground sensation among investors and borrowers alike. The idea is simple - Kiwis with spare money help other Kiwis looking for a short term loan with low fees and interest rates. The loans are then managed by websites, acting as online platforms, which (somewhat) cut out the middlemen and embrace the “sharing” economy. Firms like Harmoney and Squirrel Money have seen a surge of transactions as people look for lower lending rates and higher investment returns; lenders are told they can receive returns of 8 to 12% per annum while borrowers are lured in with bank-beating personal loans.
Peer to peer lending can work well as a long term investment, but before you go all in on this hybrid form of saving, it’s essential you understand how peer to peer lending works as well as its risks and limitations.
This is a complete guide to the best peer-to-peer lenders in New Zealand, explaining how the platforms works, how the industry is regulated, what the risks are and how the different players compare. Beyond this page, we've reviewed P2P leaders Harmoney and Squirrel Money separately to provide a complete guide to their offering for investors and borrowers.
The Financial Markets Authority regulates peer to peer lending, and only companies on the New Zealand approved peer to peer lender list can offer such investments.
In this guide
- What is peer-to-peer lending?
- What are the risks – Why P2P isn’t for everyone
- 10 P2P Must Knows
- Best Peer-to-peer investment returns - Harmoney – earn up to 14%, minimum investment $500 and Squirrel Money – earn up to 8.89%, minimum investment $500
​What is peer-to-peer lending?
Also known as crowd-lending, P2P websites are financial platforms that match borrowers to investors. People apply for loans via a P2P platform's website, and if they are approved, investors fund the loans charging them an agreed upon interest rate. Investors are enticed by P2P because of above-market interest rates, whereas borrowers are offered lower interest rates compared to finance companies and banks. The P2P platforms replace the bank/lender, funding the borrower with the lender's money. and charging a "match making" fee by way of a service charge.
Peer-to-peer lending looks and feels like a bank or finance company term deposit, but it's very different. If a borrower doesn't repay, your P2P investment can be reduced. The ensure minimum risk to lenders, P2P platforms have their own credit application criteria. This includes thorough credit checks by third party agencies and affordability tests. P2P platforms also manage the day-to-day loan repayments and collections process for overdue loans. Bad debt, which arises when a borrower doesn't repay the loan, is deducted from your investment.
P2P lending may appeal to you if you're free of personal debt and want a higher return on money you'd otherwise invest in term deposits. If you feel comfortable taking a punt then go for it. You'll learn a lot more about this niche investing industry while you (most likely, but not guaranteed) beat the returns from banks. Compare the most current interest rates:
Peer-to-peer lending looks and feels like a bank or finance company term deposit, but it's very different. If a borrower doesn't repay, your P2P investment can be reduced. The ensure minimum risk to lenders, P2P platforms have their own credit application criteria. This includes thorough credit checks by third party agencies and affordability tests. P2P platforms also manage the day-to-day loan repayments and collections process for overdue loans. Bad debt, which arises when a borrower doesn't repay the loan, is deducted from your investment.
P2P lending may appeal to you if you're free of personal debt and want a higher return on money you'd otherwise invest in term deposits. If you feel comfortable taking a punt then go for it. You'll learn a lot more about this niche investing industry while you (most likely, but not guaranteed) beat the returns from banks. Compare the most current interest rates:
Term deposit interest vs peer to peer predicted returns – as at January 2018
It's worthwhile noting that the interest you earn from peer-to peer lending will need to be assessed in your annual tax return. Unlike bank deposit income, P2P lenders in New Zealand do not tax your interest income upfront.
- Best 2 year interest rate: Bank of India, 4.00% per annum (minimum $5,000)
- Best 5 year interest rate: TSB, 4.05% per annum (minimum $10,000)
- Peer-to-peer websites : An estimated 7-9% per annum (Squirrel Money) and ~12-14% per annum (Harmoney)
It's worthwhile noting that the interest you earn from peer-to peer lending will need to be assessed in your annual tax return. Unlike bank deposit income, P2P lenders in New Zealand do not tax your interest income upfront.
Know the risks: why peer to peer lending is NOT for everyone
P2P works for many investors but it isn’t for everyone. The benefits of above-market returns can be outweighed by the risk of having your money invested in an unsecured loan. The primary risk of any investment in P2P is not having your capital repaid, but each P2P platform has strict credit controls to minimize this risk. We’ve outlined everything to consider when looking to invest in peer to peer lending.
Peer-to-peer is closely regulated
The Financial Markets Authority is heavily involved in the regulation of P2P. Currently there are only four active players either taking investments or loaning money. Due to the costs of regulatory compliance to set up a P2P platform coupled with the challenge of Harmoney's dominance in the market, we do not see new players starting up any time soon.
Peer-to-peer is closely regulated
The Financial Markets Authority is heavily involved in the regulation of P2P. Currently there are only four active players either taking investments or loaning money. Due to the costs of regulatory compliance to set up a P2P platform coupled with the challenge of Harmoney's dominance in the market, we do not see new players starting up any time soon.
10 P2P Must Knows
P2P platforms vary in the way they operate, but our must-knows below generally apply across the industry.
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Your cash may not be lent to borrowers immediatelyAfter funding your account, you need to wait for a borrower to make a loan application. Some P2P platforms are more popular than others, so while you wait to fund a loan your cash is not earning any interest. If you’re investing say $10,000, this may take a few weeks to drip feed into available loans.
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Most P2P lending is unsecured - you may not get back what you put inIf you invest your money with a bank and they lend it unwisely, the bank is obligated to repay your investment. With peer-to-peer lending, unless the loan is secured, you are not protected if the borrower defaults. You can’t go after them personally either as the identify of borrowers is always protected by P2P platforms. Any loan default is written off against your investment. Some platforms may have funds set aside to protect against this risk, but the cost will be funded one way or another by your investment.
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If a peer-to-peer site goes bankrupt, who would manage and collect the loans?This is a significant risk as the industry is new to New Zealand and it’s reasonable to expect not every platform to stay afloat. By law, the loans are between you and the borrower, so if your P2P platform goes under you’ve still got a right to your money. All platforms have an independent trustee who appoints a backup third party loan administrator, but such an event would likely disrupt the day to day loan management and collections processes. The details of loans would be passed on, but the collections process could be different and the changes might cause a rise in defaults as borrowers become aware of the situation.
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You can’t withdraw your money earlyOnce you’ve lent your money to borrowers, the term of repayment is fixed. This means that you cannot break the commitment and redeem or withdraw your money early. If a loan was for 36 months, you’ll receive your money back in equal chunks every 36 months (unless the borrower repays it early, or defaults altogether). If you invest in a fixed-term deposit with a bank, you can withdraw with or without penalty but access to you cash is near immediate. This is not possible with most peer-to-peer lending platforms.
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Horror Stories CAN happen in New ZealandPeer to peer lending comes in many forms. Some P2P platforms have raised money for business ventures that have have later gone bankrupt leaving investors with nothing. In New Zealand, crowd-funding platforms like the Snowball Effect have raised money for projects that have turned sour - the financing of the film Mahana being an example . There is no certainty that future repayments will be made, especially if economic conditions deteriorate, and unsecured loans are usually the last to be repaid by a distressed borrower. Essentially, current economic conditions cannot be relied upon to justify making a medium or long term investment.
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You have to sort out your own taxesP2P platforms don't usually deduct PAYE from your investment income. This means that when you submit your tax forms, you'll need to declare P2P earnings and pay tax on them. You can offset capital losses (i.e. bad loans written off) as well, but it's added work. If your investment is around $1,000 it's likely that your pre-tax earnings every year will be between $50-$150 and the added tax work may be a turnoff from doing P2P in the first place.
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The more a P2P platform has lent, the better its data on lendingThe more lending a P2P has undertaken, the better the platform is likely to be in terms of its credit processes. It will have more data, can make better decisions and reduce bad debts for investors.
A P2P platform with a large number of loans is likely to be more efficient and be in a better financial position than a small P2P with a tiny loan book. For example, a P2P with 5 staff and a $100m loan book is probably more financially secure than a P2P with 5 staff and a $2m loan book. |
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Your investment can be active or passiveP2P platforms offer different ways to invest. For example, Squirrel Money is a passive investment - they pick the loans your money goes into and invest accordingly. You simply receive repayment when money is returned by the borrower. This differs to Harmoney which lets investors pick the loans they want to invest in, and what interest rate they want to receive. Passive P2P offers a "set and forget" approach, whereas active P2P lending tends to grow investor knowledge. What is right for you will depend on your overall interest in Peer To Peer lending.
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Diversification is the key to the best returnsLenders have the best chance of protecting their investment though diversification. If you lend $1,000 to a specific borrower and they don't repay, you will lose everything the borrower hasn't repaid. For this reason, P2P platforms encourage splitting up your investment to reduce being overexposed if a loan goes bad.
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Investors don't pay fees, but you will be charged in other waysThere is no fee for an investor to join a P2P but both the borrower and lender are charged on both sides of a loan transaction. An investor will usually pay a percentage of either the capital invested and/or a percentage of the interest received. The borrower will pay an application fee and indirectly contribute to the P2P's margin when interest and capital are repaid.
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Best Buys - Which peer-to-peer lender should I use?
New Zealand’s market is growing fast, with eight players operating as of January 2018. However, we’ve narrowed it down to a clear top three that make up the majority of the market and give the best returns.
We've listed them below in order of usability, not necessarily returns. The most important difference between the various platforms is how they minimize your risks as a lender. The more loans the platforms have issued, the better their data and the more identifiable bad borrowers become.
Each site works slightly differently, but in general the bigger the risk, the higher the return.
We've listed them below in order of usability, not necessarily returns. The most important difference between the various platforms is how they minimize your risks as a lender. The more loans the platforms have issued, the better their data and the more identifiable bad borrowers become.
Each site works slightly differently, but in general the bigger the risk, the higher the return.
The biggest platform in New Zealand with the highest average return for investors
Current rates: 13% per annum
Historic bad debt rate: 3.05%
Fee: $500
Early withdraw? Not permitted
Unlent cash kept in: Heartland Bank
Loan protection offered? Yes, at an additional fee
Min/max lend amount: $3,000 to $70,000
Money lent so far: ~$700m
Lenders active: ~20,000
Risk mitigation. Harmoney converts every $25 invested into one "note", and assigns a maximum of one note per loan. This diversifies your investments, and you have the option of selecting the loans you want to invest in, or using auto-invest. You select your risk type - the lower the risk, the lower the interest rate.
How quickly can you withdraw money? You need to wait out the duration of a loan to be repaid - there is no sell out function.
Current rates: 13% per annum
Historic bad debt rate: 3.05%
Fee: $500
Early withdraw? Not permitted
Unlent cash kept in: Heartland Bank
Loan protection offered? Yes, at an additional fee
Min/max lend amount: $3,000 to $70,000
Money lent so far: ~$700m
Lenders active: ~20,000
Risk mitigation. Harmoney converts every $25 invested into one "note", and assigns a maximum of one note per loan. This diversifies your investments, and you have the option of selecting the loans you want to invest in, or using auto-invest. You select your risk type - the lower the risk, the lower the interest rate.
How quickly can you withdraw money? You need to wait out the duration of a loan to be repaid - there is no sell out function.
The second largest P2P with fixed returns and the best loan protection
Current rates: 7.89% (2 year rate), 8.89% (5 year rate) after fees but before income tax.
Bad debt rate: 0.80%
Fee: Up to 3% p.a. of the loan balance (deducted from gross loan repayment)
Early withdraw? Yes, with a fee of 1% of the loan balance fee (up to a maximum of $50 per investment)
Unlent cash kept in: ?
Loan protection offered? Yes, not directly charged to investors, provided by Loan Shield
Minimum and maximum investment in platform: $500 to $2m
Money lent so far: ~$20m
Lenders active: 500-1,000
Risk mitigation. Squirrel Money offers a set rate at the time you put money in. You should receive this, unless there are major problems with the loans.
How quickly can you withdraw money? Its secondary market allows you to exit loan contracts immediately as long as there is another investor wanting to buy them. There's a fee to get your money back, currently set at 1% to a maximum of $50.
Current rates: 7.89% (2 year rate), 8.89% (5 year rate) after fees but before income tax.
Bad debt rate: 0.80%
Fee: Up to 3% p.a. of the loan balance (deducted from gross loan repayment)
Early withdraw? Yes, with a fee of 1% of the loan balance fee (up to a maximum of $50 per investment)
Unlent cash kept in: ?
Loan protection offered? Yes, not directly charged to investors, provided by Loan Shield
Minimum and maximum investment in platform: $500 to $2m
Money lent so far: ~$20m
Lenders active: 500-1,000
Risk mitigation. Squirrel Money offers a set rate at the time you put money in. You should receive this, unless there are major problems with the loans.
How quickly can you withdraw money? Its secondary market allows you to exit loan contracts immediately as long as there is another investor wanting to buy them. There's a fee to get your money back, currently set at 1% to a maximum of $50.
Other P2P Platforms operating in New Zealand
The risks that come with P2P lending make it wise to spread your money around different savings and providers - diversified investment is the best way to limit losses.
Harmomey and Squirrel Money are not the only P2P sites, although they are the largest. We've outlined two other P2P operators in the New Zealand market. These are both a fraction of the size of Squirrel Money and have their own specific lending practices as we outline below.
We do not believe there to be any further peer-to-peer consumer loan lenders actively operating in New Zealand beyond the three we've outlined. The Financial Markets Authority currently lists eight P2Ps - a couple of operators specialize in mortgage P2P lending.
Harmomey and Squirrel Money are not the only P2P sites, although they are the largest. We've outlined two other P2P operators in the New Zealand market. These are both a fraction of the size of Squirrel Money and have their own specific lending practices as we outline below.
We do not believe there to be any further peer-to-peer consumer loan lenders actively operating in New Zealand beyond the three we've outlined. The Financial Markets Authority currently lists eight P2Ps - a couple of operators specialize in mortgage P2P lending.
Small scale lender with period investment opportunities
Zagga (formerly Lendme) periodically accepts new loan applications. Investment is accepted on a case-by-case basis. Each investment is broken into $1,000 parcels, meaning the platform is more suited for large investors. Interest rates for investors range from 5.44% to 12.79% per annum. Overall we consider this P2P to lack investor liquidity and given its fractionalisation in multiples of $1,000 is not suitable for smaller investors.
Zagga (formerly Lendme) periodically accepts new loan applications. Investment is accepted on a case-by-case basis. Each investment is broken into $1,000 parcels, meaning the platform is more suited for large investors. Interest rates for investors range from 5.44% to 12.79% per annum. Overall we consider this P2P to lack investor liquidity and given its fractionalisation in multiples of $1,000 is not suitable for smaller investors.
Are you a peer-to-peer guru?
Have you tried peer-to-peer lending? If so, please tell us about your experiences and anything else you think we need to add to this guide. Email us right now - we'd love to hear from you.
Have you tried peer-to-peer lending? If so, please tell us about your experiences and anything else you think we need to add to this guide. Email us right now - we'd love to hear from you.
