3 Reasons Why Peer-To-Peer Lending Should Be In Your Portfolio


Peer-to-Peer (P2P) lending is a fixed-income instrument. The concept of how it
works is that individuals lend money to Small & Medium Enterprises (SMEs).
It is somewhat like crowdfunding, where people pool money to give it to a
company that they want to support. However for P2P lending, they lend money
instead as an alternate investment.

On average, the lending period for the loan is
usually about one year.

Here are 3 reasons why you should consider having
P2P as an investment instrument within your portfolio.

 1. Spreading
more eggs across more baskets

Unlike equities, where you need to put in your cash
and possibly hold out for many years to ride out both the highs and the lows of
the market, P2P lending repays you the money put in on a monthly basis over the
loan period (subjected to exact details of the project).

That means you receive both your principal sum and
your interest back periodically from as early as one month from the time of
your lending.

Having a quick turnaround means that you do not
need to worry about having a sum of money being locked away for a long period
of time. Neither do you have to worry about price fluctuation, as with the
stock market.

P2P lending essentially add (1) small and medium
size company risk, (2) a fixed-income instrument and (3) a shorter time frame
of investing into your portfolio. Thus, spreading your eggs (money) across more
types of baskets

 2. Generating
a higher return

Compared
to bank deposits, returns given by companies taking peer-to-peer loans are much
higher. You are looking at an interest of 1.5% 
monthly,
compared to a bank deposit that could be as low as 0.11% annually.

Of course, comparing the returns generated between
these two asset classes is overly simplistic. A saving account and a P2P loan
are entirely different products and comes with different risk factors. Money in
a saving deposit is safe and guaranteed by the Singapore Depository Insurance
Corporation as long as it is deposited with a registered bank. Money lend to a
company via P2P is far from being guaranteed.

At Funding Societies (FS), one of the fastest
growing P2P lending companies in South East Asia, the average rate of return
has been ~12% % per year for the loans crowdfunded till now. One of the biggest
risks in P2P lending is default risk. So far FS has been able to manage the
risk well with zero defaults. The other major risk is the platform risk and
investor fund management. FS has mitigated this risk by being the first
platform in Singapore to have an escrow account managed by government licensed
trustee for investor funds management.

3. The
SME you are lending to are vetted

P2P platform providers are in for the business and
are trying to establish a certain level of confidence, trust and acceptance in
Singapore. Therefore, due diligence is one of the most important factor for
their business model in Singapore.

Based
on statistics, Funding Societies has thus far approved less than 20% of total
applications. They have a detailed due diligence process as well as a
proprietary scoring model that each and every SME loan application has to go
through before being listed for crowdfunding. 

 

Disclaimer : This article was seen on DollarsAndSense.sg and
reproduced with their permission.

DollarsAndSense.sg is a website that aims to provide
interesting, bite-sized financial articles which is relevant to the average
Singaporean.