Peer to peer lending - starting up
We have just launched Squirrel Money which is a new peer-to-peer lending platform. It's early days and we know we have a hard journey ahead of us. P2P allows people to invest in lending to other people. It connects borrowers and investors and makes getting money easier.
The way we are doing P2P is very different to others in the market. We have market based interest rates that are set by Borrowers and Investors through a bidding process. We have a reserve fund (Loan Shield) that protects investors from loan defaults. Borrowers pay a risk premium that is diverted to the reserve fund to cover expected credit losses. In NZ the expected loss rate is only around 1.50% which is similar to UK experience. We are reserving at 4.00% so being inherently conservative. We are authentic with all of our loans invested in by real people. There are no investment bankers in dark suits lurking in the background. That also means we’re also taking the hard road in the short-term. Investors are likely to be slow adopters until they build trust in what we are doing. Investors don’t need to worry about spreading their risk across lots of loans. We manage the credit risk using Loan Shield. This makes investing simpler.
What does it mean for you?
For homeowners it could be access to funds for a renovation or to replace cars without having to go over 80% LVR and without having to jump through countless hoops. Property investors are likely to have similar needs. Given the 70% LVR rules in Auckland, Squirrel Money gives investors more options if and when they need to extract equity. The same is true of rentals at 80% LVR across the rest of the country. Squirrel Money can also allow Investors to fund projects like relocatable houses that are traditionally difficult to fund through banks. Squirrel Money will lend up to $70,000 with interest rates starting at 9.00% and with a flat fee of $500. That makes it a cost effective way to borrow additional funds without jumping through too many hoops.
P2P is also an opportunity for investors. Surplus funds can be easily invested for a return of around 8.00%. Squirrel Money has a reserve fund called Loan Shield that protects investors from credit losses. If a loan defaults the repayment is covered by the reserve fund. This way investment returns are more consistent and reliable and a good source of income. An 8.00% low-risk yield is appealing in a world where bank deposits return around 3.50%. At 8.00% you can generate reasonable passive income. Selling a property and investing the proceeds might significantly improve your cash flow. P2P is still in its infancy. We’ll see more innovation as it grows, and as the market gets used to how it works. There will no doubt be scope for bigger loans and SME lending which will evolve over the next year or two.