6 July 2016 –

good-bad-ugly-charactersI’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.

harmoney_logoOn 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.

26 thoughts on “Peer2Peer lending – The good, the bad, and the ugly”

  1. Hey Martin,

    It was interesting reading through this, as I’ve read many accounts from a North American perspective, but none from an Australian. I suppose I still haven’t read an Australian one as you revised a Kiwi company, lol. Are there any Australian options that are decent?

    I have considered P2P as an option, but there a couple things that would hold me back.

    How it would perform in a recession worries me, as I’d imagine there would be a lot more defaults. Would the money be delayed, or lost?

    Second, I’m not sure how the interest is going to a lower risk borrower when the interest return you’ve received is far higher than what a bank would charge (and that’s your net rate, after fees, not gross right?). Unless you’ve chosen a riskier investment level?

    It’s an interesting concept and I like the idea of it. I just hope it’s as regulated as it should be and doesn’t cause a GFC knock on effect of bad loans.


    1. Hi Tristan, firstly, I only reviewed the company I have experienced and since most of my investment funds are still in NZ, that’s where they ended up. So I’m not able to give you the low-down on what the Oz providers are like but I’d be interested to know if someone else has tried any of them.

      A recession is one of the worries of P2P lending as that is when most borrowers will begin to default, when the financial going gets tough. Harmoney only have unsecured loans so the risk is definitely higher but my experience has been good so far. My preferred risk profile is in the C and D (out of A to F) category so middle to low-high risk profile.

      Unfortunately, if a borrower runs off with your money, it’s gone but that’s the reason for fictionalising, to spread your risk over many loans so that the impact of loss is reduced. If the funds are recovered later, you do get your money back.

      The reason why my return has been above 14% is because I have invested in those higher risk loans so they pay higher interest rates.

      The lowest rate for an A+ lender is around 9% which is pretty good for an unsecured loan.

      That’s the good thing about P2P is that they offer a range of risk profiles to lenders.

  2. Hi Martin, I haven’t ever used a P2P lending platform. I’ve stayed away because off the perceived high risk as you mentioned as well as the lack of history of the platforms (ie how they perform in recessions). Interesting to hear your review and commentary on it though because I’ve never dug into the mechanics/fees. Thanks for sharing.

    1. Hi GS, yeah P2P is a higher risk than many other investments and I, for one, wouldn’t risk the farm on it but it is a viable investment for those who are up for some higher risk/higher return investing. I guess we will see what happens next time we have a recession. One of the problems with P2P is that you can’t withdraw the funds that are borrowed although some platforms have a ‘secondary market’ where lenders can offer their loans for sale. My thinking is that should we start to slip into recession, the value of existing loans will drop and someone with big pockets and even bigger cajones could pick up some bargains. Let’s not even think about recession shall we.

  3. Martin, thanks for sharing your experience with P2P lending. I haven’t gotten involved at this point due to my aversion to this level of risk. I’m glad, however, that it is working out well for you!

    1. Hi FSH, thanks for your comment. Actually, it’s not working out that well with the fee hike so I’m not investing further with these guys. For the same return as I will be getting, post hike, there are safer investments I will be moving to.

      I may move back into P2P once the market and the platforms mature.

  4. Those rates sounds pretty awesome compared to what I have heard from US companies.

    I haven’t tried this yet, but I have explored it and read a few reviews. I have a few other places to put my money for awhile but it is definitely intriguing.

    1. Hi AE, the rates are pretty good but all of the loans on this platform are unsecured so there is significant risk. As I said in response to Finance Superhero’s comment, the returns will take a dip with the recent fee hike so I’m not investing further with these guys.

  5. We haven’t gotten into P2P since it’s not available in North Carolina. I can understand on principle how the hike in the fee structure might motivate you to get out. But if you still consider it a good investment tool that offers good odds (yes, it’s a gamble) at making money, I’d probably stay in. Especially since you indicated you haven’t invested a large amount. Mr G and I have a similar strategy with our lithium investment.

    1. Hi Mrs Groovy, thanks for stopping by and commenting. When I say it’s not a large amount, I mean compared to other investments. It’s $30k which is still plenty. You’re right, the return is still good but I feel that there are safer options now with similar rates of return. Once your money has been lent, you can’t get it out until it’s repaid unlike many other investments. If the going gets tough, you have no option but to ride it out.

      I haven’t heard of a lithium investment before. Can you tell me what this is?

      1. Yes, $30K is nothing to sneeze at. Our lithium investment is in a stock. LACDF is the symbol. Unlike the P2P, we can get our money out if we want.The stock still hasn’t broken a dollar yet but it’s like a lottery ticket that we’re waiting out.

        There are several other lithium companies out there too. If you’re interested you might want to take a look at a few people on Twitter. @tweetlithiumnow is one of them and @kirilklip – I don’t really pay much attention but I know they tweet. Also Joe Lowry @GlobalLithium or you can google articles about him by searching Mr. Lithium.

  6. I’m a fan of P2P lending and it’s a great way to diversify your greater portfolio, but due to its high risk, I would (and do) approach with a level of caution. I’ve only invested a small amount of money, and unfortunately my Lending Club loans all seem to be defaulting (Prosper is doing better).

    I’ve written a guest post on My Money Design awhile back about P2P lending, and one of the things I compared was the P2P loan to a traditional bank loan. Both are the exact same, and the banks have been more than willing to make these loans. So why shouldn’t we?

    Great article!

    ARB–Angry Retail Banker

    1. Hi ARB. It’s great to hear from someone who is investing in P2P. I’m still in a quandary as to whether I continue to reinvest as the funds become available or withdraw them. Granted, the return is good, but it’s the lack of liquidity that concerns me more than the risk of not getting repaid.

      I’m starting to think that what I’ll do is remain with my current level of funding and just reinvest back into new loans as funds become available.

      Like you, I do seem to have quite a few borrowers in arrears at any one time but, thankfully, I have only had one loss of $100 which was due to a fraud. Not good but Harmoney tell us that they have put more robust checks in place to reduce this. Always a risk though.

      Please feel free to add a link to your article.

      Thanks for stopping by and commenting.

  7. While I understand your frustration, I think you should look at what the structure is today and whether you’re comfortable with it rather than what is was before. Even net of the increased fees, 12% is still a very high return. Have you compared a risk-adjusted return for P2P lending with index investing? It sounds like this is a small allocation. As such, I would keep invested in the P2P loans to drive a little upside for your portfolio.

    1. Hi there FS. I have come to a decision to keep my current level of funding and see how it performs over the next few months. If my actual rate of return starts to drop and gets below 10% I will reconsider at that time.

      As you say, it does add some additional diversity to the portfolio, however, I don’t see it becoming a major contributor as the amount of work to keep reinvesting would be just plain annoying. Unless they put in place an auto-invest function. I will wait and see.

      Thanks for your comment and input.

  8. I considered P2P a few years back but never did for a variety of reasons; primarily because my home state was one of the U.S. states that did not allow it at the time. Interesting to hear about your experiences and get your thoughts. Even though P2P is now permitted in my state, it is no longer something that would fit into my portfolio and perhaps more importantly, it seems to me that it isn’t such a great option for individual investors anymore as the big banks have become dominant players and radically changed the landscape.

    1. Hi James, perhaps the banks here in Australia and NZ aren’t as competitive as they are in the US but borrowing from P2P platforms seems to be a viable option judging by the number of loans listed on my platform each day.

      One of the things that I was initially sceptical about was whether it was going to be the last ditch place for desperate borrowers to get funding from. As it turns out, there is a big range of risk options available from low risk, low interest rates to high risk, eye watering rates. The lower rates are very competitive and are often lower than the banks offer.

      It is a higher risk addition to the portfolio which is why I haven’t bet the farm on it.

      Thanks for your comments.

  9. I have been going back and forth on if I want to invest in P2P for a while now. I think ultimately I am staying away because of the risk and I think they wont so very well in a recession now that they have grown so large (and lowering their standards a bit to make more loans). The idea of them also potentially increasing fees on me while I hold the note is a bit worrisome as well! Nice review of it though! Helped me realize my position really hasn’t changed!

    1. Hi Thias, P2P isn’t for everyone but the returns are pretty good if you’re willing to take on some extra risk. That’s why I would always limit my investment in P2P but it does add some diversification to the portfolio. Thanks for stopping by and commenting.

  10. I have been entering P2P – and do agree with the added risk. However if you look into dividends and yield, compared to the ROI in P2P, the balance is clearly skewed. I currently favour P2P, but i am slowly expending my funds and keeping it in short-term loans (1 month). In general those will result somewhere around 12% (annually – so 1%/month), with a buyback guarantee. Hereby some of my risk have been negated. As long as the stocks are high, and dividend yield is rather low, with few opportunities, i think i will give it a go.

    1. Hey there Mr MB. You’re the first one here to join me in P2P investing. The buyback guarantee certainly has some appeal. Is that dollar for dollar (I’m assuming here that you use $) or can you be offered less than you paid for your notes?

      I guess the main thing that concerns me with my P2P portfolio is that all loans are unsecured so while the economy is doing well, I don;t expect to get many defaults. But if the economy takes a dive, I could get left holding a pup.

  11. Hi,

    I have been thinking of getting into the p2p lending market and it was nice to see a review with a Kiwi perspective. What are your thoughts on the other companies in NZ as opposed to Harmoney?


    1. Hi there Ankur. Thanks for stopping by and commenting. I have also tried Lending Crowd they have pretty good rates and their loans are all secured against property or a vehicle. Now that Harmoney have whacked up their fees, LC’s rates, which have always been lower, are now looking a lot more attractive, especially as their loans are secured.

      The only problem with LC is that they have very few loans on offer compared with Harmoney. If you plan on fractionalising across a lot of notes, you may be waiting a while. Since they don’t have any means of notifying lenders of new loans, you may have to log on to their site several times a day.

      In the end, I got frustrated and withdrew all of my remaining funds from them as it was going to take forever to get them invested.

      Besides that, the feedback on LC is good but be prepared for a long wait to get fully invested if you are putting up a reasonable amount.

      I haven’t tried any of the others as they don’t fit with my investment profile. I hope that’s been of some help.

      1. Thanks for your reply. It helps although I guess i need to explore a bit more before I take the plunge.
        look forward to reading your future articles 🙂

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