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Concerns raised peer-to-peer investors do not understand the risk they take

cashflow_property.pngWould-be investors are being warned not to put too much faith in peer-to-peer lenders.

There are now four platforms operating in the New Zealand market: Harmoney, Squirrel Money, LendMe and Lending Crowd.

They operate by matching investors with money to lend with borrowers seeking loans, and taking a fee for the service.

Harmoney was the first and biggest of the platforms, with more than $250 million in loans written so far.

Investors are promised better returns than they could get from putting their money in the bank. Harmoney is reporting a realised annual return for investors across its portfolio of 11.83 per cent.

The riskier Harmoney deems the borrower to be, the higher the interest rate.

But there are warnings that some investors may not understand the risk they are taking - and that while the platforms do the work of gauging borrowers' credit rating, it is the investor who wears the pain of any default.

Financial adviser Liz Koh said she would not invest in peer-to-peer lending.

"I would be concerned at how they do their credit ratings, and concerned at the lack of diversification," Koh said.

If money was placed with a bank, the bank was responsible for lending it to a wide range of borrowers. But with a peer-to-peer situation, it was more specifically tied to the fortunes of the individual borrowers, she said.

"They do assess their credit ratings but how good are they at doing that? You are relying on their judgement."

Business commentator and insolvency practitioner Damien Grant said Koh was right to be worried.

Unlike a bank, which would take the hit if a loan went into default, it was lenders who bore all the risk with a peer-to-peer loan, he said.

"[The platforms] do not meet the borrowers in person. It is all done online and it should come as no surprise that Harmoney has already experienced a small amount of fraud.

"This raises an interesting question - what happens next? Nothing. Harmoney faces no exposure for bad loans. The business does not need to cover the investors' losses. They are under no obligation to seek restitution," Grant said.

Harmoney would benefit if a loan was repaid, because it would take its fee, but it was not financially exposed if the loan went bad, he said.

"If the borrower defaults Harmoney promises to chase them up. If they manage to convince the debtor to pay Harmoney takes some more fees before repaying whatever amounts are collected.

"Investors are not allowed to sue for negligence. They are not allowed to know the names of the borrowers. They have no right to take any legal action against the defaulting debtor," Grant said.

The fact that the platforms were licensed by the Financial Markets Authority (FMA) would give people a false sense of security.

"The public look at this and may think that this means it is a low risk investment vehicle or worse some fools may think there is a degree of oversight," Grant said.

"This isn't the case. The FMA basically wants to know who you are and make you fill out some forms. There isn't any real oversight, or any oversight at all."

Harmoney said it was the only company in its sector that ran a completely open marketplace with transaction statements, including detail down to individual loan applications, while protecting the identities of borrowers, and every single movement of money.

LendMe chief executive Marcus Morrison said the concerns were valid for traditional peer-to-peer platforms. "Most of what happens in peer-to-peer lending is algorithm-based, and unsecured so how do you as a lender understand what that means and how it works? They might say it's an A-type loan or an E-loan but if you're Joe Public, not a sophisticated investor and not doing the analysis yourself, how do you know that?"

But he said LendMe investors had extra protection because it deals with secured loans, usually backed by a property. "People get that a bit more, it's easier to understand."

Squirrel Money offers a reserve fund to cover investor losses.

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Real Estate Investar Editor
Real Estate Investar Editor
Real Estate Investar provides intelligent software, tools and data to help you save time and make money in the residential property investment market.

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