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Peer to Peer Loans in New Zealand

What are the returns, risks and pros and cons, and is your money safe? Our guide explains what you need to know.
Updated 15 July 2024

Summary of Peer to Peer (P2P) Lending in New Zealand

Peer to peer lending - an introduction

  • 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 Squirrel 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 5% to around 8% 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.
 
Our Guide
  • This guide outlines the best peer-to-peer lenders in New Zealand, explaining how the platforms work, how the industry is regulated, what the risks are and how the different players compare. Beyond this page, we've reviewed Squirrel separately to provide a complete guide to the company's 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 we explain:

​What is peer-to-peer lending?

  • Also known as crowd-lending, P2P websites are financial platforms that match borrowers to investors.
  • Borrowers 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 'matchmaking' 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.
  • To 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. 
 
As an investor, P2P lending may appeal to you if you're free of personal debt and want a higher return on the money you would 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' term deposits.

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 minimise 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 Harmoney's exit from the market, we do not see new players starting up any time soon. 

10 Peer to Peer Lending Must-Know Facts

P2P platforms vary in the way they operate, but our must-knows below generally apply across the industry. 

Your cash may not be lent to borrowers immediately

After 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.

Most P2P lending is unsecured - you may not get back what you put in

If 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 identity 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. 

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. 

You can’t withdraw your money early

Once 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 will 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 your cash is near immediate. This is not possible with most peer-to-peer lending platforms.

Horror Stories CAN happen in New Zealand

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.

P2P providers often deduct the tax from your returns

P2P platforms may deduct tax (RWT) from your investment income. If your investment is around $1,000, it's likely that your pre-tax earnings every year will be between $50-$150 and the RWT will be deducted at source by the P2P provider. 

The more a P2P platform has lent, the better its data on lending

The 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 five staff and a $100m loan book is probably more financially secure than a P2P with five staff and a $2m loan book. 

Your investment can be active or passive

P2P platforms offer different ways to invest. For example, Squirrel 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. 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.  

Diversification is the key to the best returns

Lenders have the best chance of protecting their investment through 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. 

Investors don't pay fees, but you will be charged in other ways

There 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. 

Peer-to-peer lenders available

New Zealand’s peer-to-peer lending market originally grew fast, with eight players operating as of September 2019. However, by 2024, only two players remain - Squirrel and Zagga. We've listed these two below - each site works slightly differently, but in general, the bigger the risk, the higher the return.
The largest New Zealand peer to peer lender with fixed and variable returns and the best loan protection 
  • Current rates: Visit Squirrel
  • Early withdraw? Yes, available.
  • Loan protection offered? Yes; see details on the Squirrel website.
  • Minimum and maximum investment in platform: $500 to $2m
  • Risk mitigation. Squirrel 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 another investor is wanting to buy them, at no fee to you.
  • More details: Read our detailed Squirrel review here

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. 

An alternative to Squirrel:
  • Zagga periodically accepts new loan applications for first mortgage lending, an area of P2P it specialises in. Investment is accepted on a case-by-case basis with the platform focused on sophisticated investors, funding credit-worthy borrowers.
  • Loans range from between $25,000 up to $2 million and are predominantly secured through first mortgage security. Investors fund anything from $1,000 up to the full amount of the loan; interest rates for investors are typically between 6% and 10%, depending on their risk appetite and desired return.
  • The company has stated publicly that since launching it has had a sole focus on higher-quality loans. All loans issued to borrowers are assigned a risk grade and an associated interest rate, handled by the Zagga credit team. Every loan is supported by loan documentation and the associated security; this information is available to every investor on every loan.​
  • More details: Zagga.co.nz
​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. 

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