6 July 2016 –
I’ve been writing this article for a while now. It’s not a case of being too busy to finish it. More a case of the ‘goalposts’ keep moving for me.
Let me explain. I’ve been investing in Harmoney, a New Zealand-based Peer2Peer (P2P) lending platform for about eight months now.
Peer to peer lending matches people that want to invest with people who want to borrow, through an online marketplace. Peer to peer lending platforms, like Harmoney, facilitate this process.
Loans are split up into smaller units (called notes) which investors lend on. This is called fractionalisation and means that a lender, instead of risking their funds in one loan, spread their investment over many loans effectively reducing their risk.
Like all P2P investors, I was attracted by the high returns, albeit at a higher risk level than other investments I own.
I also liked the idea of having funds from borrower repayments, being available as a form of regular income that I could withdraw if required or reinvest if not needed.
I’m a fairly unemotional investor but my P2P lending experience has certainly brought out the opposite in me and I’m working hard to fight it.
Now I can’t decide whether to increase my investment, withdraw my funds completely, or sit and wait to see how my investment performs over a full twelve month period before deciding.
On one hand, my personal annual rate of return is currently 14.6%. That’s pretty healthy. But on the other hand, Harmoney have just increased their fee structure by a whopping factor of three!! That’s bad.
Harmoney have recently changed the way they charge investors. Until June, it was a flat 1.25% of interest and principal paid by the borrower. Unfortunately, Harmoney actively promoted re-writing of loans for higher amounts to their borrowers. This, in effect, meant that they clipped the ticket once on the initial loan, and then again on subsequent re-writes.
As you can imagine, the Harmoney lending community has not been happy with this double-dipping. So, in response to increasing criticism, Harmoney have changed the fee structure to a percentage of just the interest paid. Sounds good, but the fees have increased by around three times. Be careful what you wish for.
Up until this point, I’ve been pretty happy with Harmoney. Their online investment site is easy to use and they are constantly improving it.
However, their new charging structure has given me cause to rethink whether I continue using them as an investment provider.
As much as I didn’t like their previous charging system, it was effectively costing me a rate of 5%. Now, it will be more like 15%. This means that my net annual rate of return will drop from 13.87% to 12.41%. Still pretty healthy but remember that on the risk profile ladder, this is near the top as far as I’m concerned.
This article started out as a review of P2P lending from my experience but seems to have morphed, over time, into something else.
So, if you are considering P2P lending as an investment opportunity, here’s my take on it.
- Be prepared to lose some of your investment funds. Even though splitting your funds (fractionalising) into many small loans reduces your risk, there are some borrowers who will run off with your money. If the thought of some scumbag effectively stealing your money, then this is probably not for you.
- Your funds may be paid back sooner than the loan term. This does reduce your return on that loan but you can then just reinvest it into another or withdraw the funds.
- If a loan goes full term (in Harmoney’s case, 3 or 5 years) you won’t have access to those funds until it’s completely paid off. In saying that, each payment your borrowers makes goes back into your account so can be reinvested or withdrawn.
Some P2P platforms have what’s called a ‘secondary market’ which gives investors the opportunity to list their loans for sale to other investors. Harmoney don’t have this feature.
Other platforms have an ‘auto invest’ feature (Harmoney doesn’t) which you can set to reinvest your funds as they become available in your account. You set the lending criteria you want and then leave it to do its thing.
If your choice of platform doesn’t have this feature, be prepared to spend some time each day in your account reinvesting your funds.
I personally don’t get into the moral argument of P2P lending. Some have an opinion that this form of lending takes advantage of people who may not be in a position to borrow from anywhere else. I disagree. Most P2P lending platforms offer loans for low-risk borrowers at rates that are lower than the banks offer. They also offer loans for higher-risk borrowers but at increasingly higher rates.
As a lender you can choose which loans to invest in. If you are morally (or financially) against lending to high-risk borrowers, you can decide to only lend on those that you feel are a better fit with your risk profile and moral standpoint.
And so I must decide what to do going forward. I don’t have a huge investment in Harmoney so this is not going to be a future-changing exercise. But still, if I can make greater returns in a safer environment (such as my index fund portfolio) then I need to consider withdrawing my funds for reinvestment.
Have you invested in P2P lending? If you have, tell us about your experience. Would you recommend it as an investment or stay well away? How does Harmoney compare with your P2P provider?
If you’re considering P2P lending as an investment, feel free to ask any questions you may have. I can’t give you advice but I’m happy to share my experience.