Handling The Peer Pressure

Investors are learning to live with changes brought on by low interest rates and tighter curbs on lending

- Darren Snyder

In the not too distant past, peer-to-peer (P2P) lending was seen by some investors as a way to fund (and earn interest from) loans at any time, at any size, at any investment grade and at any interest rate. If a borrower was willing to accept or be “matched” with these loan terms, P2P investors felt that if this was a risk each party was prepared to take – end of story.

What’s not factored into this scenario is the intermediary, the P2P lending platform, which makes these loans and investment transactions happen. The platform must comply with ASIC’s responsible lending requirements and this means reviewing whether the loan is suitable for the borrower (that is, can they afford to pay?) – an outcome that arguably suits investors in the long term.

This, combined with tighter lending criteria at all financial institutions, has reshaped the way Australia’s P2P lending market looks and operates in 2020.

John Cummins, SocietyOne chief investment officer, says this P2P scenario unfortunately creates an investment bias where investors would only source the “best” or highest-paying loans on offer. In this case, an investor couldn’t have more than one or two of these loans in their portfolio facing delinquency because they’d start to lose capital.

“If I give them [the investor] an average loan size of $20,000 and I give them five loans, then one goes down – not only are you not getting any money [from that loan], you’re starting to lose people’s capital,” he says.