By Matt O'Neale - 25 Jun 2015
Peer to peer lending (or P2P) looks set to grow in New
Zealand with the introduction of LendMe later this
year. Offering competition for banks and finance companies,
the new P2P finance model is an interesting alternative to
traditional means of lending and borrowing.
As the name suggests, peer to peer lending is lending with a
much narrower gap between investors and borrowers than that
previously bridged by banks and other financial
institutions. Under a traditional finance model, an investor
lends spare cash to (for example) a retail bank by way of term
deposit, who then on-lends that cash to borrowers.
Peer to peer, by contrast, does not involve a bank. Rather,
an investor typically lends via an online platform which pairs that
investor with borrowers. The creditworthiness of each borrower
is first assessed by the online platform and disclosed to the
investor, who can then decide which borrowers (and level of risk)
they are comfortable lending to. The online platform charges a
fee for this service.
Harmoney became New Zealand's first licensed peer to peer
service provider on 8 July 2014. Based on its website, it
currently targets the consumer finance market and permits borrowing
of up to $35,000. Investors can currently earn between 9.99%
and 39.99% interest (less tax and fees) with the predicted risk
determining the interest earned.
A new player now looks set to enter the market with LendMe being
recently granted a licence by the Financial Markets
Authority. In contrast to Harmoney, LendMe says it will target
the residential property market and offer loans of up to $2
million. Unlike big banking, peer to peer providers are not
subject to the Reserve Bank's LVR lending restrictions. LendMe has
stated that it intends to utilise this point of difference to offer
borrowers up to 100% of the purchase price of their home.
While a potentially attractive option, peer to peer, is not
without its risks. Investors need to assess those risks by
gaining a good understanding of the following in each instance:
- The disclosure statement setting out how the particular service
works, its fees, and its intended assessment of each borrower;
and
- The client agreement, which is the investor's contract with the
service provider and outlines the terms of the two parties'
agreement.
Borrowers need to understand the merits and risks of P2P,
including gaining a good understanding of their obligations before
signing up to any loan, and the consequences if they cannot meet
those obligations.
Lenders and Borrowers alike would be prudent to take advice from
their financial and legal advisers before committing to any P2P
arrangement.
Contacts
Matt
O'Neale
Craig
Nelson