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. 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 they are trying to establish a certain level of confidence, trusts and acceptance in Singapore. Therefore, due diligence is one of the most important factor for their business model in Singapore.
At Funding Societies, there is 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
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