Average return of 12% forecast but such lenders have failed overseas.
It's hard to get decent interest on investments. Most banks are paying 3 to 5.5 per cent and financial companies 4 to 7 per cent. It's not a lot.
Those people dependent on fixed interest for their incomes are always looking for ways to get a greater return on their money. In the past they chose finance companies, which paid much higher returns than the bank. That was riskier than investors realised and many lost their life savings.
There is a new fixed-interest investing platform on the block, peer-to-peer (P2P) lending, which launched in New Zealand last month.
HarMoney is New Zealand's first P2P lender. It doesn't lend to borrowers directly. Instead it offers an online platform to connect investors with borrowers. Anyone wanting to borrow goes through an online approval process and is assigned an interest rate according to the risk they pose. Investors then go online and choose the loans they wish to fund. They can chop their investment into $25 lots and spread them across a number of loans.
HarMoney makes its money by taking a 1.25 per cent cut on the interest paid by borrowers and also the profit on any dishonour or late fees paid by borrowers. As well as providing the technology, the people behind the platform (including Suva call centre staff) also need to carry out a collections process for those loans that go bad.
Around 250 private investors have signed up to lend money so far, says Neil Roberts, HarMoney's chief executive. It attracts borrowers via Google searches and media coverage.
For investors it should, in theory, be safer than investing in the type of finance company that went bust in the past decade. Some of the finance company owners treated investors' deposits as something akin to a personal piggy bank.
Money invested via HarMoney is spread across a wide range of loans and is held in a trust account, not on the platform's balance sheet. The money should never be seen by the company running the platform.
For the borrower, getting a loan via HarMoney is no different from going to a finance company. The borrower is vetted, signs a contract and receives their loan. He or she pays interest. If the capital and interest isn't paid back on time it's sent to debt collection.
Are the loans likely to go bad? The application process would appear to be very thorough. For example, when I went through the loan application process it did a couple of things that surprised me. One was that it required me to upload an image of my driver licence. The photo was then verified using passport scans similar to the ones at the airport. The system also required me to enter my online banking passwords so that it could log into my bank and download all of my current statements. That stops borrowers lying about their income and outgoings.
Investors can choose loans manually or use a "Quick Invest" option, set their desired risk and return levels and then have the money allocated automatically. I do worry that the quick option means you can hold up to 20 per cent of one person's loan, which makes it riskier than holding $25 in any single loan.
The predicted default rates range from 0.08 per cent for an A1 borrower to 15.38 per cent for someone classified as F5. The actual default rate is untested so it can't be guaranteed that the defaults will be that low - or high.
I decided to give it a go and signed up this week with a minimal investment. Only time, and a downturn in the economy, will tell if I've made a good decision. The average return after fees and defaults should be 12 per cent, says Robertson.
There were only five loans available when I logged in. The loans ranged from $3800 from an F1 grade borrower from Wellington paying 31.88 per cent interest, to $26,250 for a debt consolidation loan from a divorced B3 borrower from Hamilton. The latter person was earning $5246.50 a month, had lived in his current residence for nine years and had been with the same employer for three years. I did wonder why he was consolidating credit card debts at 15.16 per cent interest instead of loading them on to his mortgage for half that rate. I also wondered how he'd built up $26,250 in credit card debt and if once his credit card was reset to zero if he'd run up more debt.
One advantage for investors is that they can build portfolios with staggered maturities.
But they need to be aware that they can't withdraw their capital when they want it. With a finance company or a bank you can usually pay a break fee and get out. HarMoney plans to set up a secondary market next year to allow investors to on-sell their loans.
Investments always come with risk. The primary risk with P2P lending is that borrowers default and investors don't receive the principal and interest payments they're expecting each month.
The other big risk is that the platform itself fails to make a profit and eventually goes into liquidation. If HarMoney ceases to operate, a servicing company called Pepper is contracted to collect on pre-existing loans and administer payments to investors, and collections still pursued.
One thing that interested me was the opportunity for a small business to borrow. Anyone who owns one will know that it's mighty difficult. HarMoney will only lend to directors in their personal names. Robertson says the hope is to start lending to small businesses within a year.
A small business can also apply for crowd-funding, another new money raising avenue, which came into effect thanks to the Financial Markets Conduct Act that passed into law in April. This is the same law that allowed P2P lending in New Zealand.
One of the first Kiwi companies to crowd-fund equity in this way was Renaissance Brewing, which raised $700,000 from 287 investors on the Snowball Effect crowd-funding website. That offer is closed and the only one available currently on that platform is for shares in a Kiwi film, The Patriarch, by Lee Tamahori. At the time of writing, the project had hit its minimum target, which meant the money would be deducted from investors' accounts.
Snowball Effect isn't the only equity crowd-funding platform in New Zealand. Pledge Me has a couple of campaigns open from Techvana, the New Zealand Computer Museum, and H2Explore Limited, a tourism adventure company in Mt Cook.
One of the big problems for investors with equity crowd funding is getting your money back. It's not like you can sell your shares on the NZX. Nor can you just cash them in with the company. The main ways to exit will be to wait until the company is bought out and sell your shares then, or sell them privately.
With a one-off event such as The Patriarch film, the money will be distributed to investors once (or if) received. Assuming the film makes a profit then the small investors get more than their initial capital back. If it doesn't, they may only receive some or even none of their original investment.
I hope P2P lenders and crowd-funding platforms succeed. They will be advantageous to borrowers and investors if they are successful. But there is no guarantee that they will be and that could be problematic for any investor who has sunk in more than he or she can afford to lose.
Investors should to be cautious. P2P lenders have failed overseas even in heavily regulated economies such as the United Kingdom. There is always the risk of losing all if the model doesn't work.