A few years ago we started putting money into peer-to-peer lending, specifically Harmoney. Currently we’re gradually phasing out of the investment and I want to tell you why, but first I’ll cover off what P2P lending is and what the up sides are.
What is P2P lending?
P2P lending is essentially where an online platform such as Harmoney or Squirrel in NZ (each country will have its own platforms) matches people who need to borrow money with people who have money to lend. To spread the risk, these platforms chop loans into lots of small bits (for Harmoney it’s $25 increments), thus allowing lenders to invest in a lot of different loans without needing to have a lot of money. Loans have 3-5 year terms, which I will discuss more when I cover why we’re exiting P2P lending.
What are the benefits of P2P lending?
The interest rates on the loans are generally pretty good. Across the loans we still have sitting in Harmoney at the moment, we’re averaging probably 10% a year at the moment, although as we only have four left, one very high interest loan is skewing that figure somewhat. The risk of default can be mitigated by ensuring you invest in a large number of loans so that any one person failing to pay isn’t going to affect your overall portfolio that much.
So why are we getting out of P2P lending?
Essentially, due to ethics and liquidity. Some people borrowing via P2P lending platforms are young and stupid, trying to get their first car and tying themselves into high-interest borrowing without thinking. As much as we tried to restrict our lending to stable, rich, Waiheke Islanders wanting to renovate their fancy houses (the platform gives you some information about the borrowers without identifying them), it’s easy to be tempted by the higher-interest loans with borrowers who can probably least-afford them. We had to decide whether we could maintain our ethical standards without getting sucked into this temptation, and whether we should be supporting a platform where people can get into the very kind of debt we want to discourage people from getting into via this blog!
Liquidity is the other issue. We are at the wrong end of our investment lives to be doing P2P lending. We have a small investment portfolio which basically doubles as our emergency fund at this point in time and can ill-afford to have investments that we can’t call on for up to five years down the track. Perhaps at some point in the future, once we have a paid-up emergency fund plus significant other investments, adding some P2P lending back in would make sense, given the potential returns. Provided we feel we could do it ethically. Until then it’s just too risky to be in a position where we may need the money if something happens, but are unable to access it.
P2P lending is certainly worth considering including in your investment portfolio. But you need to decide whether it gives you the liquidity you need and whether you can live with the kind of borrowing these platforms encourage and the people they lend to, regardless of whether you yourself actually lend to those people.
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