Enrich your mind (and pocket!) with our new alternative investing podcast
Want to liven up that morning commute while learning new things?
Then the Alternative Investing Podcast with MyConstant is for you!
Every month, we’ll bring you a new bite-size episode where you’ll learn all about alternative investing and how it could make you money.
Our first episode is an introduction to peer-to-peer lending. Please give it a listen using the Spotify link below, or if you haven’t got time, check out the transcript.
(This is our first ever podcast so please forgive any errors!)
Remember: All investing involves risk. The content of the podcast is for informational purposes only and is not investment advice. Please always use caution and diversify.
An introduction to peer-to-peer lending
Hi, and welcome to the MyConstant Alternative Investing Podcast.
I’m Chris Roper, communications manager at MyConstant.
Hey I’m Peter upton and I’m the Community Manager at MyConstant.
Today, we’re going to discuss a topic that’s very close to home: peer-to-peer lending.
As you might know, MyConstant is a collateral-backed peer-to-peer lending platform.
If you’re a customer of ours, we’ve likely been paying you 7% APR on your money – which is roughly 20x better than you’d earn with a CD (and without having to lock your money away for a year or more).
And by the end of the this podcast, you’ll not only know what that is and how it works, but also how peer to peer lending started and why it’s one of the best alternative investments out there.
But first… what is peer-to-peer lending?
In the plainest terms, peer-to-peer lending is where one person lends to another person in return for interest.
For example, I might lend Peter here $1,000 for a year and then he gives me $1,070 in return. A P2P lending platform like ours helps you find borrowers like Peter so you can invest in more loans.
How would you define it Peter?
This is an interesting subject. When many people hear about peer-to-peer lending they can get a little apprehensive. They may think P2P is an untried model and it doesn’t work.
But the thing is, it already has been used for many years by banks.
When you put money into a savings account with a bank they are lending your money out to individual and institutional borrowers like businesses for a profit on the interest. They give you a little bit of that profit in the form of interest but most of it goes towards paying their staff and internal fees.
As the years have gone by the amount of interest you receive from interest in the west has gone down. Back in the 80’s you could get something like 8-15% interest, but these days you’re lucky to break 2%.
As adoption has increased, banks have seen less need to entice investors with higher cuts of interest from borrowers. You’re unlikely to move your money out of the security of the bank over a little bit of missed interest.
Peer to peer lending has come up to fill that gap using the same model but giving you more interest. Right Chris?
Yes, that right. P2P lending actually started in 2005 with a company called Zopa in the UK. Since then, P2P lending has grown to a 15 billion dollar industry worldwide.
The US and China own about 95% of the P2P lending market. It’s also growing fast in places like India, Latvia, and Germany.
That said, it has had a somewhat controversial history.
Peter, you spent some time in China. Why don’t you explain what happened there and then we’ll discuss the US next.
China was in a very unique market position when P2P started. They were developing very fast in the late 2000’s and early 2010’s – they still are – so they had a lot of small businesses.
But banks in China did not easily give out loans to fund small businesses because there was a high risk of default from many of them.
Therefore it was hard for a lot of small businesses and individual borrowers in China to get a loan as they were usually reserved for larger businesses. This created a real need for capital among the rising lower-to-middle class.
At the same time, there also weren’t as many investment options available to the average Chinese person to grow their wealth. They couldn’t necessarily access global stock markets, there weren’t bonds in banks that they could buy, there were very few options.
So P2P lending – when it came to China – filled a much-needed hole in their economy and it shot up very fast. Around 2015 there was something like 6,000 different P2P lending platforms operating in the country. But because it came up so fast it had slid under the radar of regulators.
Many platforms were not well thought out. In some cases, borrowers defaulted and couldn’t pay back their loans and in others, some platforms just disappeared with the money. This caused the government to do a big crackdown in China and as of 2019 only 417 of those 6,000 platforms are operating.
The platforms operating now are the ones with stable business models that report all their earnings.
So this kind of gave P2P a bad reputation in the eyes of the world because of some bad actors, but it did cause real change in China. Today institutional loans are more available to the average borrower and more investment options have been opened to the average person.
Now, back to the US.
The biggest lenders in the US are LendingClub and Prosper. They’d typically pay around a 5% return to their investors, which isn’t bad.
Prosper currently has a default rate of around 3-4% on average. That means about 4-5% of their borrowers defaulted on their loans and investors lost money.
LendingClub reports similar default rates, but has now stopped retail P2P lending in favor of institutional lending, leaving Prosper and a handful of others, including MyConstant, to fill in the gap.
With the coming pandemic, default rates are likely to rise, as might investor losses.
Does that mean P2P lending is a bad investment right now?
It depends on what type of P2P lending you choose.
You see, for a long time, P2P lending has had a collateral problem.
So collateral is a way to secure a loan. To break that down, the most common form of loan you’ve probably heard about is a mortgage.
You get money from the bank to buy a house and then pay them back with interest.
A mortgage is a lot of money from the bank. They want to make sure you pay interest for the next 40 years so they need to have something of yours as collateral to assure that you repay. In the case of mortgages, that usually is the house.
If you decide to disappear and not pay the mortgage, the bank will simply take back the house to cover their losses. So to sum it up, collateral is anything that you use to assure you will pay the loan.
Most P2P lenders don’t ask for collateral and instead assess borrowers’s creditworthiness. This, like a bank assessing a credit score, isn’t all that effective.
Those that do ask for collateral, don’t ask for the right type. It’s usually illiquid collateral, such as property, which can take months or years to sell.
At MyConstant, we back all loans with liquid collateral like cryptocurrencies.
We’ll do a show that explains what cryptocurrencies are soon. For now, it’s enough to know they’re a kind of digital currency that’s easily traded across 100s of cryptocurrency exchanges.
You can buy or sell cryptocurrencies in a heartbeat, making them great collateral.
We ask all borrowers to put up at least 150% of the loan amount in collateral. If they default, we sell the collateral to repay the investor.
But I know what you’re thinking… Why anyone would borrow against an asset if it’s easily sold?
Crypto right now is more of an investment at this point than a currency. The value of crypto – and generally by crypto we mean Bitcoin – goes up and down a lot.
People don’t necessarily want to sell their crypto because once they sell they wont have their crypto anymore.
For example, maybe I bought BTC at $50 but I sold at $70 to buy a car. Maybe the next day Bitcoin jumps to $1,000 dollars. If I had held onto my crypto and got a loan instead, I could have bought more than 10 cars with the same amount of BTC.
This is a technique already used by investors. You can take out a loan against a stock portfolio, for example.
You unlock the value of your assets without selling them and then once the loan is over you pay it back and if you’ve gotten a gain in the value of your assets you can pay back your loan and then some.
This is called leverage, a technique used to use the value of your current assets to get a loan to buy more assets that you think will increase in value and then put the increase back towards paying off your loan and pocketing the profits.
So there you have it.
There’s a huge market of borrowers, a genuine reason to borrow, and a liquid asset backing every loan.
With us, you earn up to 7% APR investing in collateral-backed loans for terms of 6 months or less. It’s a great way to diversify. The returns are more stable than, say, stocks, and safer than traditional P2P lenders.
If you’re based in the US and want to try P2P lending for the first time, we have a great offer for you.
Sign up now and we’ll give you a $2,000 trial at 4% APY for 30 days. After those 30 days expire, we take back the $2,000 but you keep all the interest.
This gives you a chance to experience our platform before spending a cent of your own money.
Well, that about sums up P2P lending today.
I hope you’ve enjoyed listening to the podcast and please subscribe for more alternative investments, tips, and insight into growing your money.
Please remember that all investing involves risk so please always use caution and diversify.
Thanks for listing!
(1) Roper, M. (2020, May 27). P2P Lending Looks to get Credit Moving During COVID-19 Slowdown. Retrieved November 27, 2020, from https://www.benzinga.com/fintech/20/05/16112918/p2p-lending-looks-to-get-credit-moving-during-covid-19-slowdown
(2) Liu, J. (2018, August 02). The dramatic rise and fall of online P2P lending in China. Retrieved November 27, 2020, from https://techcrunch.com/2018/08/01/the-dramatic-rise-and-fall-of-online-p2p-lending-in-china/?guccounter=1
(3) As China-US Relations Sour, Could The Revamp Of P2P Lending Serve As An Alternative Investment Vehicle? (n.d.). Retrieved November 27, 2020, from https://finance.yahoo.com/news/china-us-relations-sour-could-214648110.html?.tsrc=fin-srch
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