What Is P2P Lending?
When people need to borrow money (such as a mortgage), they usually go to the bank.
However, the bank doesn't lend its own money.
It lends money it gets from customers, like you and me.
When you deposit $1,000 into Westpac, they lend that money out as a mortgage to someone else.
Westpac will lend your money out at 6%, then pay you 2% interest.
This is how banks make money.
P2P lending is short for "peer-to-peer" lending.
The idea of P2P lending is cutting out the middleman (the bank) and letting people lend money directly to each other, or "peer to peer".
Today, there are several peer-to-peer lending platforms operating in New Zealand.
While technically there is still a middleman (the platform itself), it is only there to facilitate the loan.
You can think of it like a Trademe for mortgages.
Trademe doesn't actually run a store and sell goods, it just connects the buyer and seller.
P2P lending platforms work in exactly the same way.
When you lend money on these platforms, you take on the loan and the associated risks.
The platform just facilitates the transaction (and takes a cut as a fee, of course).
Why P2P Lending?
P2P lending is an opportunity to diversify your income streams, while also giving you access to higher yields than you would receive at a bank.
It's not uncommon for you to earn double the interest rate that banks offer.
Most P2P loans today also require first mortgage security over the properties being borrowed for, so the loan is secured.
Of course, it is up to you to review the loan documents, the borrower's credit rating and history, and ensure you are happy with the property being offered as security and the LVR.
P2P Lending Platforms
There may be other P2P lending platforms available, but below I will suggest the two platforms I have experience with.
Zagga offers P2P loans with strict borrower criteria and with first mortgage security required on every loan.
This means if the borrower defaults, Zagga is first in line to secure the property and action a mortgagee sale to recover the funds.
Zagga typically offers 2x to 3x higher interest rates than the standard call rate on a bank deposit.
Here is a screenshot of my Zagga dashboard:
I have a lot of experience with Zagga and have had a positive experience with them.
While I have had a couple of loans default, in every case Zagga's legal team successfully sold the secured property and recovered my funds in full.
I have invested over $20,000 through Zagga. You can read my full review of Zagga here.
Squirrel is a platform I started using back in 2018 for a couple of small investments but have not used it since.
I found it harder to use than Zagga because there were less borrowers, but the platform seems to have grown since then.
Squirrel operates a bit differently to Zagga in that you don't select specific loans to fund, instead you contribute your money to a "fund" and Squirrel handles the lending for you.
The funds hold all the loans together and investors earn a fixed rate of interest:
I don't have as much experience with Squirrel, but according to their website, they have never lost a cent in customer funds since their inception in 2015.
The way they protect customer funds is by taking a small percentage of their profit on each loan and putting it into their Reserve Fund, which is used to cover any customer losses.
As of writing, they have $1.7 million available in their Reserve Fund.
I have invested $2,500 in Squirrel and had no issues, however, I have not used the platform in some time.
P2P Lending Summary
P2P lending is a higher-risk, higher-return strategy to earn interest on your savings.
Your money is not protected by banks or the government banking guarantee.
However, you will earn a higher amount of interest.
The loans are not unsecured, and (usually) will be secured against the properties being borrowed for.
To earn your first $100, simply invest $1,000 in a 10% interest loan.
After a year, you will have collected $100 in interest.
If you have a higher tolerance for risk, P2P lending can be a useful way to diversify your passive income streams.