What Is Peer-To-Peer Lending?

And is peer-to-peer lending a good investment for you?

Peer-to-peer lending, sometimes called P2P for short, is where borrowers and lenders are connected through an online middleman. The theory is that using an online platform means the middleman could avoid the cost structures of traditional banks and offer better rates – to both borrowers and investors.

In other words, P2P lending is when you either borrow or lend money to a stranger.

While it sounds simple, when you look a little closer there’s a lot more to P2P lending than first meets the eye.

Background of P2P

Peer-to-peer lending was legalised in New Zealand in 2014 following trends overseas.

The P2P lending provider acts as a matchmaker, arranging the exchange through its website. It does the credit-checking, deals with the repayments and interest payments, and chases up unpaid loans (defaults). It makes its money usually by charging fees to both the investor and borrower – and it may also take a cut of the repayments.

P2P lending is often pitched as a way for everyday people to borrow relatively small amounts from other everyday people for things like buying a car, home renovations, and holidays (though whether you should take on debt for these things is another matter!). The borrower is then charged varying interest rates depending on their profile.

The P2P platforms advertise the loans as a good way for ‘mum and dad’ investors to earn higher returns on their funds than if they left the money sitting in the bank. Of course, with a higher return comes higher risk.

The Financial Markets Authority is heavily involved in the regulation of P2P. Due to the costs of regulatory compliance to set up a P2P platform, New Zealand has very few platforms to choose from. Harmoney stopped peer to peer lending in 2020. Another provider, Lending Crowd, ceased in 2023. and others have dropped off, too.

P2P Lending – A Closer Look

At face value P2P lending might sound honourable, but P2P lenders have clashed with the Commerce Commission, occasionally resulting in court action.

At one stage it was reported New Zealand’s largest P2P lender only funded 25 percent of loans with ‘mum and dad’ investors, and met most funding needs with institutional investors, including one of New Zealand’s largest banks. Other lenders include New York and UK based investment firms – which means this is hardly the lending between peers or “everyday people” which is what we might otherwise.

For those borrowing, interest rates for P2P are usually between seven to 40 percent. This means that P2P lending may not be the “low cost” alternative of obtaining finance that it’s made out to be.

Risks And Possible Rewards of P2P

Aside from the general risks associated with any investment, peer-to-peer lending has some unique risks (and possible rewards). This includes:

• For investors, the reward is quite simple: a higher interest rate than you’ll get from a bank. The riskier the loan the investor chooses to invest into, the higher potential returns. Of course, the higher the risk, the higher the chances are of the investor not receiving some or all their funds back. This is a very real danger, as the loans are usually unsecured, which means you may not get back what you put in.
  • Some providers offer ways to reduce this risk, such as spreading your loans across more borrowers or guaranteeing the repayments themselves. This still doesn't eliminate the risk.
  • You usually can’t withdraw your funds whenever you want.
  • P2P lending providers aren’t well-regulated like banks.
• P2P lending hasn’t been around long in New Zealand. This may mean that investors or lenders are lulled into a false sense of security with this sort of lending. There is no certainty that future repayments will be made, especially if economic conditions deteriorate, as 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, as the changes in economic conditions have an increased likelihood of impacting higher risk activities such as P2P lending. Many Kiwis who remember the failure of most New Zealand finance companies around the time of the Global Financial Crisis know how difficult it is for high-risk lenders to stay afloat during a sustained economic downturn.
• P2P platforms may deduct tax (RWT) from your investment income. 
• You might not typically be charged a 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.

Should You Invest by P2P Lending?

P2P lending is a high-risk, high-return investment. This means most people shouldn’t invest unless they can afford to lose the money they’re putting into it.

Before turning to P2P lending, it would pay to consider a range of other areas, including:

• The best investments for under 65’s,
• Planning your retirement, which includes if you’re retired already,
• Investments you can own forever,
• What to consider when buying an investment property,
• How to invest in gold, and
• Start investing in shares, your guide.