Back when interest rates were hovering around zero, I was hunting for somewhere I could get a reliable yield and came across the peer-to-peer (P2P) lending space.

P2P lending is where regular people like me and you can lend to and borrow from other regular people.

You can think of it like an Airbnb for lending.

Normally the lending business is reserved for banks and finance companies, but now with platforms like Zagga it’s available to you as well.

How P2P lending works

Let’s say you want to develop a property.

It’s going to cost $1m and you have $200k in the bank, so you need to borrow $800k.

You go to the bank and for whatever reason, they say no, or the process is going to take a few months and you have a piece of land you want to settle on now.

You approach Zagga and after doing their due diligence on you and the property, they agree to fund you.

But Zagga doesn’t fund you out of their own pocket. They crowdsource the funds.

They send an email like this out to investors:

After looking through your credit report, the property valuation etc etc, I decide I’m happy to invest.

Let’s say 800 investors all agree to put in $1,000.

Zagga now has the $800,000 it needs to fund you.

Zagga charges you interest of 10.9%, pays the investors interest of 9.9%, and keeps the 1% spread for itself.

Over the next year, you develop and sell your property, pay back the loan, and Zagga repays all the investors plus interest.

The whole time the loan is secured against your property until it’s repaid.

Zagga makes money from the spread and fees, I make money from the yield, you make money from selling your property.

Win-win-win, right?

Zagga Review: My Experience So Far

Over the last three years, I’ve experimented with Zagga, investing $22,000 across 20 different loans.

The max I’ve invested in any single loan was $2,000, and generally, I have around 7 or 8 loans active at a time.

This is what my current active loan portfolio looks like:

These are my loans that have been successfully closed and paid in full:

My experience so far has been positive.

Keep in mind I started lending with Zagga around 2019, when banks were literally paying 0.5% interest on term deposits, so the increase in yield has been significant.

In total, I’ve had two borrowers default on their loans, and in both cases, Zagga successfully completed a mortgagee sale and recovered the funds in full. So my losses to date have been zero (I’ll discuss this more below).

The average interest rate I’ve received has been around 8% p.a. and it gets paid monthly.

Since the loan amounts are not large, the interest payments are not large either, but it is nice to see my money working and seeing deposits like this hitting my bank account each week:

What Are The Risks?

I would say the risks of investing in a platform like Zagga are low-medium.

The first line of risk is with the borrower. If the borrower defaults on his/her loan, you risk losing your capital.

Zagga secures all their loans with a first mortgage over the property, so every loan is “secured” and you are protected to a degree.

However, this doesn’t guarantee full protection, because you have a second line of risk with the property itself. If the borrower bought the property for $1m, and the value of it falls to $700k, a mortgagee sale might not recoup all the funds.

Your third line of risk is with Zagga. You place an element of trust in Zagga to:

• Do proper due diligence on their borrowers and properties
• Operate their lending business responsibly

For example, if Zagga uses a bogus property valuer and lends money on the basis of the property being worth $800k when its true value is closer to $600k, you might end up in trouble.

And if Zagga themselves turn out to be bogus and disappear or go bankrupt tomorrow, you’re likely to be looking at losses as well.

The final risk to think about is your time/opportunity cost. If a borrower defaults, even though you have security against the loan it can take a significant amount of time to go through that process.

It’s possible your funds will be locked up for months/years while Zagga’s lawyers try to sell the property and recover funds.

Why Would A Borrower Use Zagga Instead Of A Bank?

My initial question before investing with Zagga was, what’s in it for the borrower?

Why would someone get a 9% mortgage from Zagga when they could get 4% from a bank?

I talked to Zagga about this and this is what they said:

Typically, as you would have perhaps seen, most of our borrowers are borrowing for what we would call ‘bank grade’ loans. Our average Loan-to-Value Ratio of 53% strongly suggests this. However, there are a myriad of reasons why a borrower might struggle to achieve funding at a bank. For example, the banks are currently very reticent to fund any form of residential construction (and this has been the case for the last 4 or so years). They simply don’t seem to like being involved in progressive drawdowns for the typically small amounts required in a residential construction of the nature we often fund. If they do fund them, they will also want 100% pre-sales and / or, they will want one unit build at a time and then sold before commencing the next unit. For a builder this makes little sense for 2 simple reasons; 1) sales achieved pre completion never achieve the same value, and 2) if you are building multiple units next to each other then you save a lot of money if you do them in stages (all earthworks, followed by platform on one then the next, framing on one then the next, etc) rather than completing a house before starting the next one.

Additionally, the banks are simply very slow, so if a borrower wants to settle a little quicker than the banks can be an unworkable option for a borrower. Further, banks have a range of other criteria (like borrower’s age, whether self-employed, etc etc) that can push perfectly good borrowers outside of bank policy. We, for example, have had borrowers with a perfect credit history (never had a default or any adverse features) who still can’t get bank funding because they were over 65 years old (and they were borrowing circa $300k against a $1m property). Which to my mind makes no sense. But, the bank sets these rules and then follows it rather tightly.

As a result of all of this, the second tier (non-bank) lenders typically account for approximately 10% of all of the lending going on in any given year. Over the last few years, since the banks were forced by the Reserve Bank to hold a greater degree of capital against every dollar they lend, we have seen this figure creep up a little to perhaps 12%. So, this is the space we operate within.

And finally, because we tend not to charge as much as many of the other second tier lenders, we are able to get the lower risk deals that are available to the second tier. That has been a strategic decision we have made since inception which we feel best reflects our more conservative disposition as well as the fact that our investor database tends to be more conservative and more risk averse on balance.

Apart from being impressed with taking the time to give me such an in-depth answer, I found the explanation made a lot of sense too.

I see this quite often with friends of mine – one of whom is retired and worth millions of dollars, but can never get funding from a bank to buy rentals because he doesn’t have a full-time job.

I have another friend who develops properties for a living and constantly complains about how slow banks are to approve funding for her projects.

Even personally, I know back when I was a graduate accountant making $45k a year, banks were more than happy to lend to me. But now that I earn much more and am worth much more, banks make me jump through hoops because I’m not a full-time employee on PAYE. So in terms of their target market, their answer makes a lot of sense.

How “Secure” Are The Loans?

The other question I had was, how does Zagga ensure they indeed have the first mortgage security?

What’s to stop a borrower signing their property away as collateral with Zagga, and then doing it again with another P2P or offshore lender? Are there any checks and balances Zagga does against this? This is the kind of thing that happened before the 2008 crash.

I asked Zagga about this and this is what they said:

This is a totally fair question. The cornerstone of our business is that we do indeed take a 1st ranking mortgage. This means that our interest is placed against the property within the national Land Information NZ register. Before a solicitor can put another interest against the property they have to check what is already there, and with our first mortgage they are precluded from doing anything without our consent. For example, if the borrower wanted to raise a Second Mortgage against the same property they would have to seek our approval as 1st mortgagee first. Which, we could withhold of course (but in the event of a default, we would hold all the power of decision making regardless and would have no obligation to recoup the 2nd’s money. Other than our standard obligation to achieve best price reasonably obtainable). Likewise if the borrower wanted to have a caveat put against the property. NZ’s centralised (online) register makes all of this very easy to monitor and take control of. And there are very strict rules for anyone trying to put something against a property.

I find this explanation satisfactory but to be fair, I haven’t actually looked into it further (whether this online register actually exists and what the rules are), so I’m taking their word for it.

What Happens When A Loan Defaults?

In the event of a borrower defaulting on their loan, the general process is Zagga will take control of the property and sell it to recover as much funds as possible.

This is the same process as when you default on your mortgage and the bank carries out a mortgagee sale.

Over 20 loans I have invested in personally, this has happened twice so far (10% default rate). In both cases, Zagga’s lawyers were able to successfully sell the properties and recover my funds in full.

Whether this is representative of Zagga as a whole, I’m not sure. I have no idea what Zagga’s overall default rate is and if there have been loans they haven’t been able to recover, and haven’t asked.

Here’s a look into what happens when a borrower defaults.

Loan #1:

This loan started showing problems about six months in. The loan details were:

• Amount: $418k
• LVR: 72%
• Interest rate: 9.14%
• Term: 1 year

After missing a couple of interest payments, Zagga was in touch about the borrower showing signs of distress. Due to privacy/non-disclosure reasons I’m not sure exactly what I can and can’t share, so I don’t think I can publish the full emails, but here’s an excerpt:

You will have noticed that the payment you received last month was only half that of the usual amount. The remaining balance of which has been paid to you today.

As a result, the current payment is 5 days late, and the Borrower is accruing penalty interest on any outstanding balances.

We are working with the Borrower to try and find out more information, but understand that they are waiting on a number of their key creditors to make payments to them over the course of the next week.

If we are not satisfied with the progress during this time then we will be looking to commence the mortgagee sale process.

We know that this will be disappointing to you, but we and our lawyers are very experienced at dealing with this process. We will of course keep you up to date with information as it comes to hand.

Around a year later, Zagga recovered and paid 90% of my principal back, and about two months after that topped up the full amount:

Regarding the abovementioned loan, further to previous correspondence, I am pleased to inform you that the sale of the main security block settled on Friday. Accordingly we have paid you an interim settlement amount of $892.47 to your nominated bank account this morning. While this constitutes almost 90% of the principal amount having been repaid there is still a total of approximately [removed] outstanding in terms of 10% of principal, ordinary interest, penalty interest, and costs remaining to be recovered. 

Loan #2:

This loan defaulted early in 2020 during the Covid lockdowns as the property was linked to a business in the travel industry.

• Amount: $455k
• LVR: 77.1%
• Interest rate: 8.1%
• Term: 2 years

As you will be aware, interest for this loan for last month was due to be paid to you yesterday. We have, at this stage, not made this payment and it seems unlikely that the borrower will be able to do so. All other payments to this point have been up to date.

You may recall that this loan was secured by an Accommodation property in [removed]. As a result of Covid-19, the borrower’s business income has fallen to zero and it seems unlikely that he will be able improve on this picture for the foreseeable.

We will be locking in the services of a real estate agent and will be obtaining an updated valuation for the property. We will be pushing everything through as quickly as we legally can for you. Please rest assured that you will continue to accrue ordinary and penalty interest from the moment the monthly payment was not made.

Over the following months, Zagga’s lawyers took care of the mortgagee sale and managed to recover the funds in full. It was approximately five months between this email and the email below.

Further to previous emails regarding our recovery efforts on your behalf for this loan, I am pleased to inform you that we have this morning paid you both your principal balance of $1,000.00 and the remaining interest of $49.68 Please note that this interest component includes both ordinary and full penalty interest, but is net of RWT and Loan Management Fees.

After a relatively tireless effort from our CEO Marcus, the real estate agent and our lawyers at [removed], we are thrilled to have achieved full recovery for you. Please note that this recovery includes full recovery of costs which Zagga had pre-paid on your behalf, and which the lawyers carried as a contingency for their fees.

As we have mentioned previously, it is a real testament to both our unique model (with secured loans sitting in their own bare trust on your behalf) and our team that we are able to achieve these types of outcomes in the rare circumstances when due to a change in circumstance borrowers are unable to honour the terms of the loan. Please rest assured that we continue to do a massive amount of due diligence on the nature and quality of the security as well as borrowers’ willingness and ability to finance their debt as part of our standard process for every loan we put on site.

On reflection, both of these loans I shouldn’t have been invested in to begin with.

I generally look for an LVR under 60% with very experienced developers and 1 year terms or less. The loans above had LVRs of 72% and 77%, and one was for 2 years.

I don’t remember my train of thought at the time, but back in 2019 everything was peachy and I think the low amount of the loans (both under $500k) gave me a false sense of security. It was lucky both the loans were recovered, but I would say my decision-making here was iffy as well.

Update 2023: Another loan default, and another successful mortgagee sale. This one took several months, but they managed to do it and recover all funds. Nice!

How to reduce your risk:

If you’re interested in investing in Zagga, here are a few things to think about:

• Understand how to assess the risk on a loan. Obviously, a low LVR helps. If the property is worth $1m and they’re borrowing $400k, the risk profile looks pretty good. If the property is worth $1m and they’re borrowing $800k, it’s a bit shaky.
• Read the credit report of the borrower and look at their history. Try to invest with experienced borrowers/developers with a good track record.
• Diversify, especially with small amounts. $1,000 into three different loans is generally less risky than $3,000 into a single loan.
• I personally like shorter loan terms. Speed matters. A good developer doesn’t need to sit on your funds for 2-3 years. My opinion is the longer they take to build/sell, the higher your risk of default.
• Don’t rush! It’s okay to wait for loans you like. If you don’t have a good feeling about a certain loan, pass on it and wait for the next one.

My Final Thoughts On Zagga

Based on my experience until now (which admittedly is limited), I’ve been impressed with Zagga.

The platform is easy to use and their loans generally are funded quickly.

They’ve been great in answering my questions and their communication overall is impressive. If they are one day late on an interest payment, they email you and explain why. In the event of a default, they keep you updated diligently on every step of the process.

They are also onto you like a hawk when you miss a deadline – for example, I was overseas once when a loan hit full funding, and I missed the deposit date to send through my contribution. Zagga called me that night in Australia to chase me up. Seems like they run a tight ship and get things done. I like that a lot.

As for P2P loans as an investment in general, I’m still on the fence.

Personally, I feel like it’s a good way to diversify and enjoy a nicer yield while taking on a bit more risk. But I’ve still only used it sparingly, mostly for research purposes. As you can see, I’ve put in $22k over the last 3 years. Not exactly a life-changing amount.

Would I be confident to put in $500k? Probably not.

However, that’s where the opportunity with the platform really is. At an average of 9% p.a., putting in $5k means you yield $450 a year, which is pocket money. But putting in $500k would yield you $45k a year, which is a full-time minimum wage. That’s where these high yields can change the game.

If I were to go that route, I would definitely do a lot more due diligence than I do now, which would involve visiting the actual properties myself, and if possible meeting the borrowers personally as well. If you compare it to putting $500k into stocks or $500k on your own property, it’s an interesting idea to think about. Zagga really gives you an opportunity to be the bank and enjoy returns on the opposite side of the property market.

As for now, I will continue using it on the side as a way, similar to the way I use DeFi – another P2p form of lending for crypto.

These avenues are a way to diversify my blue arrows. As my experience with the platform grows, maybe I’ll look at a bigger allocation in future.

Questions about Zagga? Leave them below!

The above opinions are my own based on my personal experience with Zagga. I was not compensated for this review.