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Peer to peer lending on the rise

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:

  1. The disclosure statement setting out how the particular service works, its fees, and its intended assessment of each borrower; and
  2. 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.


Matt O'Neale

Craig Nelson


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