What Is Peer to Peer Lending?
P2P lending is a form of e-commerce. It provides an alternative source of financing, which can be for business or personal loans (in some cases both, depending on the site in question).
The idea is fairly simple: investors put their money on the P2P lending site, and the cash is loaned out to borrowers who need it. There are many variations on this basic idea. For example, some P2P sites let lenders set their own interest rates, to attract borrowers as they see fit. Some group borrowers into risk categories, and allow lenders to decide which groups they are comfortable with.
Why is this such a good idea? Well here are some points to consider:
- Most P2P lending sites have better performing loan books than banks. In the UK for example, default rates for some are as low as 0.8% over eight years. The risk is surprisingly low, despite the radical nature of the business model.
- There is a rapidly growing base of borrowers, because retail banks just don’t seem fond of business loans. In Singapore for example, it’s tough to get a business loan without showing good performance over at least two to three years. P2P sites like CapitalMatch are going to be a favourite choice for growing companies.
- Net returns to lenders has been high, around 20-24% per annum for Capital Match, with a minimum investment of $1,000. One would be hard pressed to find a passive investment that performs as well, when matched to the risk involved.
Will it Work in Singapore?
Making money through p2p lending lending is still a new concept in Singapore, with CapitalMatch being one of the pioneers at present. The company has reportedly processed nine loans since 2014, with an estimated total value of $1.4 million.
Financing will be an issue for Singapore based SMEs in the next five years, due to the combination of a tight labour market and lower liquidity. It’s unlikely that there will be a shortage of borrowers. Investors however, are a different story.
Singaporeans are still unfamiliar with the notion of lending their money online, and are more risk averse than adventurous. That means P2P lenders are likely to be more focused on convincing investors in the coming years, which might mean attractive deals (high returns, low cost of entry, etc.) to the early birds.
How does the lending process work?
The lending process is straightforward. For sites like Capital Match, all you need to do is:
- Register as an investor (you will need a scanned copy of your NRIC)
- Look through the list of companies seeking loans
- Select the company you are willing to loan to (it is not binding until 80% of the financing needed by the company is filled, so you will need to wait for other investors before the loan begins)
- Once the funds are transferred, you will be updated on loan repayments electronically.
You can open multiple accounts if you feel the need.
What Are the Risks Involved?
P2P lending is not yet regulated by the MAS. The other, most obvious risk is one of default – there is a chance that the borrowers may fail to make repayment, and it is up to the investor to be cautious who they invest in.
For CapitalMatch, the company issues loans in the amounts of $50,000 to $200,000. They have an approval rate of 20% for businesses that seek loans, which reflects on a fairly strict vetting process – potential borrowers are screened internally, and have a creditworthiness check with DP Credit.
Is It Worth Investing in?
Assuming the projected returns of 20 – 24% per annum are right, this would make P2P lending (at least with Capital Match) one of the best fixed income investments available. There is, of course, a degree of risk commensurate with such unusually high returns.
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