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Default Rates in Peer-to-Peer Lending Platforms

To paraphrase Crowdfund Insider’s “The Ultimate Crowdfunding Guide,” with peer-to-peer (P2P) lending, the risk an investor accepts is default. Every P2P lending platform has its own policy on default, and all investors need to take the time to understand these policies in order to protect themselves.

Because every P2P platform has its own default policy, and because the P2P lending business model is relatively young, we must be cautious when making generalizations about default rates across all platforms. Specific to Funding Societies, we fully aim to keep default rates close to banks – not exceeding 4 to 5% of loan amount to secure healthy returns for investors, even accounting for the cost of default.

The industry’s youth may cause investors with low-risk tolerance to view P2P lending as an unpredictable instrument. Generally, there is a consensus among investors that P2P lending constitutes a higher-risk, but higher-reward investment.

Is this belief true and valid? Let’s take a look at the global trend of default rates in P2P lending platforms.

Default Rates on P2P platforms in the USa

Let’s begin with default rates in USA platforms. In this fascinating article, the author analysed historical trends of default in two well-known USA platforms, then drew conclusions about the default rate of the P2P industry.

(Note that the article was published in 2014, so some might find it dated. However, the analysis within is worth a read)

The writer pointed out that from 2007 to 2008, the USA economy was doing very poorly and that both Lending Club and Prosper were operating under their earliest and most imperfect credit models, which means the default rates of 2007 and 2008 can be waved off. Since 2010, both platforms have averaged a 5% default rate and are likely to continue having solid repayment rates in the future.

The article ends with a positive conclusion about the P2P lending industry. The author wrote: “I see refined underwriting algorithms and mailed borrower marketing, encouraged investor capital and purpose-built technology all repositioning itself over and over for the past eight years until they are arrive at the stable place they hold today. I see analysis and sweat and reanalysis in these charts, and in the end I see it culminating into one of the most simple and creative investments our country has ever seen.”

His statement underscores that under the right circumstances, which includes an innovative team and rigorous credit policies, P2P lending platforms thrive and provide attractive returns while lowering default rates. The key is in selecting a trustworthy platform to invest in.

Read More: 5 Reasons To Invest in Peer-To-Peer Lending

DEFAULT RATES ON P2P PLATFORMS IN THE Uk

Moving on, let’s focus on a well-known and respected P2P lending platform from the UK: Funding Circle. In their statistics page, Funding Circle claims that its average annual default rate stands at 2%. The rate has also remained solid over the years (calculated from 2012-2017), showing that platform maturity and good credit underwriting will stabilise default rates.

funding societies’ DEFAULT RATES

What about our own platform, Funding Societies? Here is our own statistics page. Historically, our default rate across the region has lowered overtime, which reflects the analysis of P2P lending platforms in the USA: continuous platform improvement and rigorous credit policies will lower default rates.

Another worthwhile read about the risks in P2P lending is the study released by the UK Peer-to-Peer Finance Association (P2PFA). Some of the study’s pertinent points include:

  • The P2P industry has created more choice in the financing and investment market.
  • P2P lending platforms conduct credit risk assessment using the financial industry’s best practices.
  • P2P lending does not create systemic risk. Platforms are well-placed to weather a downturn in the credit cycle – defaults would need to increase at least threefold to reduce average interest rates for investors to below zero.

So let’s go back to the question we asked earlier: is P2P lending a higher-risk investment? Not necessarily.

However, the P2PFA study presented two caveats: that there is a good regulatory framework for the P2P industry and that investors are educated. For the first point, MAS has begun setting up regulations for P2P lending platforms. Funding Societies has always been compliant with regulations; we hold the CMS license required by MAS to operate, along with taking due diligence and our credit assessment process very seriously.

For the second point, there will always be risks in investing, including risk of default in P2P financing. But there are ways to mitigate such risks.

Read More: Investing In An Uncertain World

how can i diminish p2p investment risks?

How do you diminish P2P investment risks? You diversify your investment and reinvest your returns.

Diversification means distributing your funds across as many investment opportunities as possible to prevent loss in case of default. The more diversified you are, the more protected your investment. Even defaults hardly disturb your rate of return. If you choose not to diversify, you stand to lose most of your investments should a default occur.

Meanwhile, reinvestment refers to the act of funnelling your investment gains into new investment opportunities to maximise your returns. Without reinvestment, you only receive the expected rate of returns. But with reinvestment, you can maximise (sometimes doubling, even tripling) your returns while minimising your investment risks in case of default.

For more information on diversification and reinvestment, see here.

When investors fully understand the risks of P2P lending and take proper precautions to protect their funds, the advantages of investing in P2P lending clearly outweighs the risks. In fact, it’s very likely that most investors who keep diversifying and reinvesting their investment will continue to earn positive returns.


This is an updated version of an article posted on this blog. Click here for the original article.

This article was written by Funding Societies, Singapore’s leading peer-to-peer (P2P) lending platform. They provide working capital loans for small and medium-sized enterprises (SMEs), along with attractive investment opportunities to the broader public. 

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

4 Things About Your Personal Finance To Handle Before Thinking Of Starting Your Own Business

Prime Minister Lee Hsien Loong made a trip down to Silicon Valley earlier this month to visit some of the top start-ups in recent years. During his trip, he met some of the top entrepreneurs in the world over including Facebook’s Mark Zuckerberg and Tesla & Space X CEO Elon Musk.

Starting your own business is not easy, especially if you are not born with a silver spoon. Aside from needing a top notch idea, a great team for execution, the perfect timing, the right investors and a nice dose of luck, you also need to get your own personal finance in order…first. Failure to do so would cause unnecessary stress to an already stressful career.

Before you think of taking the plunge to be your own boss, here are some personal finance matters that you should consider first.

Read Also: 5 Signs You Are Ready To Change Your Job

1. Can You Embrace A Simple Lifestyle?

When you run your own business, a large part of the effort you put in is to grow the business for tomorrow. Start-ups or new businesses do NOT work for today. They work for tomorrow, while balancing today’s need.

When you hustle, you hustle for tomorrow.

This has two main implications.

The first implication is that if (and that’s a big “if”) the business succeeds, you get to enjoy the long-term value that it brings to you, its shareholders. That could be in the form of passive income to shareholders or a big exit through an eventual sale of the business.

The second implication is that you are not going to be paid well (if any) for running this business of yours today. And that “today” can easily last 4 to 5 years.

Forget about flashing your CEO namecard at clubs or buying expensive bottle of drinks for your entourage, you wouldn’t be able to afford it. Those restaurant meals that your friends are enjoying may also be out of the question.

Rather, homecooked dinners followed by cheap coffee are likely to be the norm. So would squeezing onto the train to get to work each morning.

Billionaire Elon Musk once lived on about $1 per day in his college days. The reason for him doing so was to test himself if he really had what it takes to be an entrepreneur, and be able to survive under extreme circumstances. Elon Musk rational was that if he could survive on $30 per month on food, then it shouldn’t be too difficult for him to earn and survive on that amount as an entrepreneur.

He could. Can you?

2. Are You Able To Endure Being Underpaid?

Businesses take time to grow. If you are creating a start-up (i.e a business that nobody has done successfully), you will need even more time to grow it.

People who work regular jobs expect to be paid salaries that commiserate with their average output. When we are worth $3,000 per month as a fresh graduate, we expect to be paid that amount. When our skills and experiences increase, we expect to be paid more.

When you are working on your own business, this logic needs to be thrown out of the window. Even if you are the super employee/boss of the company doing everything from closing business deals, delivering great products and services to your clients and being a one-man accounting team, you might still be paid $2,000 per month – for doing a great job.

You might be working harder and smarter than all of your peers and still be earning the least amount of money among everyone whom you know, at least for the first few years.

Can you handle that?

3. Can Your Family Cope Financially With Your Decision?

Most of us have financial commitments in life. Some of these commitments are long-term, such as paying for the home mortgage and taking care of the needs of our children and elderly parents.

Like it or not, financial commitment to our family is one thing that we cannot get ourselves out from. You might be able to live a simple life, but your family would need to be able to cope and live with that decision you are making.

The hard and unfair truth is that not all of us are born into family that can manage the stress of financial uncertainty.

4. Do You Have A Strong Savings Plan?

Even if your business eventually turns out to be sustainable in the long run, personal cashflow challenge is one aspect that you cannot ignore.

Most businesses have cashflow challenges. Account receivable is one area that finance managers are always keeping a lookout of because poor management of your cashflow can potentially sink an otherwise profitable business.

From an individual standpoint, there might be days where you might need to allow your business to owe you unpaid salary in order to stay afloat. Your personal savings will have to step in for these challenging days in order for you to tide over short-term cashflow difficulty.

Read Also: 5 Reasons To Quit Your Job Even If You Have Not Found A New One

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

Investing in an Uncertain World

Here’s an example of how uncertainty can affect the average investor: prior to the 2016 US Election Day, most polls had projected a Hillary Clinton victory. The eventual result was different, not to mention unexpected. The shock impacted the markets even before the official winner was declared. As Donald Trump’s victory became more and more assured, gold prices soared; the metal is generally seen as a safe asset and a hedge against inflation. Meanwhile, emerging market stocks tumbled and the US dollar reached its highest point since 2003.

In the immediate aftermath of the 2016 USA elections, the markets certainly reacted and the fluctuation reflected anxiety for the future. Investors asked: is long-term market stability still possible? Will the markets continue on this volatile streak? Will they calm after a while? Given a situation of financial instability, what should the typical investor do?

Donald Trump’s victory was a catalyst for financial swings, but the reality is, market instability often happens and investors need to prepare accordingly. Certain (but not excessive) precautions should be taken to buffer against unexpected upheavals. How to do so? Diversify your portfolio, hunt for new investment opportunities, and stay calm even during choppy times.

Diversify Your Portfolio

Political events often upset both the markets and investor confidence. Some investors choose to behave in a more conservative manner (see the spike in demand for gold immediately after the 2016 USA presidential elections). Others choose to try and time the market in the middle of insecure times by pulling their assets and getting back in later when the markets stabilize.

But timing the market is a very risky affair, even for experts. If you want to fortify your portfolio in anxious times, you should diversify across different asset classes and rebalance your instruments periodically to maintain your risk profile.

Telling investors to diversify is very basic advice, but think about it. Diversifying your investments is something you can control in the midst of uncertainty. You get to choose which instruments to purchase and how much money you are comfortable allocating into each asset class.

The main idea here is to balance the potential for risk and reward. For example, let’s say your portfolio consists of company stocks and precious metals. Your stock value may have been erratic over the USA election season, but the value of your gold has gone up. As you can see, with a well-diversified portfolio, you remain in the clear if the stock markets fluctuate for the long-term, as your returns aren’t determined by the performance of a single asset class.

Don’t overload yourself with real-time market information, but do look at all asset classes and see how they will fit into your portfolio and your risk tolerance. The bottom line is: if your overall portfolio is doing fine, then geopolitical situations matter less.

Read Also: This Infographic Will Tell You All You Need To Know To Defend Your Investments

This Is a Good Time to Hunt for New Investment Opportunities

If you think your investment portfolio is already well-balanced and you have covered the basics (fixed deposits, bonds, gold, stocks, etc), you can research new places to invest your money. There is an advantage to routinely looking at all the available options and seeing how they fit your portfolio because over time, asset classes produce different results. So to maintain your preferred risk profile, an investment portfolio needs periodic rebalancing.

If the current market climate is rendering you a little skittish, you can try investing small sums into alternatives. Technology, for instance, can be a promising sector.

Internet stocks are obvious suspects. Think about how essential brands like Google have become. But note that unless you are an early investor in these tech companies, your returns won’t be spectacular. Also, if you already own company stocks, other areas in technology can answer the gap in your portfolio.

Innovative and profitable technology companies are not exclusive to Western markets. One technology-based investment opportunity that’s growing in Singapore is peer-to-peer (P2P) lending, which utilized online platforms to match borrowers and investors. Borrowers take out financing for working capital or other business necessities, while investors who had collectively funded the financing opportunities gain interest-based earnings in return. Investing in P2P lending has several benefits: good return rates higher than deposits or bonds, a low entry barrier suitable for those wanting to try the business model first, and a streamlined online process.

Despite being a relatively new instrument, a study by the UK Peer to Peer Finance Association (P2PFA) stated that so long as investors are educated and the regulatory framework is sound, P2P lending does notcreate systemic risk. In fact, defaults would need to increase at least threefold from current levels to whittle down investor interest rates to below zero.

These days, certain apps can give you real-time updates on your favorite investments or even figure out the best investment mix for you. New opportunities are out there. Take the time to research and find new investments you can be confident in. Look for instruments with good growth that you can feel secure in.

Stay Calm and Don’t Make Rash Decisions

Yes, it can be difficult to enact this advice when your portfolio contains your hard-earned money, future hopes, and retirement plans. Investing can be as emotional as politics, making it difficult to stop watching the market’s every move. Yet it is counterproductive to overanalyse the current situation; there are too many variables. All the information overload can induce panic and cause you to “sell low, buy high” instead of the other way around. Additionally, don’t succumb to the temptation of making speculations. Impulsive decisions can change your portfolio drastically and at the moment, you need a balanced and stable portfolio.

Read Also: Invest Based On Your Investment Objectives, Not What Others Are Saying

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.