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.
Based on information provided from two well-known P2P platforms that we know, you may earn about 8.88% to 20% per annum via MoolahSense and 2.2% to 2.5% per month via Capital Match. These returns are based on their current campaigns.
Here we would like to remind people that P2P lending carries with it a much higher risk compared to leaving your monies in deposit accounts or investing in “blue chip” stocks.Therefore, do contact the relevant P2P platforms for better understanding of their products before putting in your money.
3. The SME you are lending to are vetted
These 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.
Based on Capital Match’s statistics, the company has thus far only approved 10 loans out of a total of 66 applications. That means less than 2 out of 10 loan applications from businesses are approved, affirming the fact that Capital Match is a company that provides strong screening for all its loan applicants.
Both MoolahSense and Capital Match have their internal system of checks before they actually launch a campaign for the approved loans.
The people behind these P2P platforms are not without a wealth of experience in the credit and loan industry. You can read more on their profile here.
Capital Match: http://www.capital-match.com/about.html
DollarsAndSense.sg is a website that aims to provide interesting, bite-sized financial articles which are relevant to the average Singaporean. Subscribe to our free e-newsletter to receive exclusive content not available on our website. Follow us as well on Instagram @DNSsingapore to get your daily dose of finance knowledge through photos.