In our second series of Personal Finance Lunchtime Talk, we welcomed Shannice Chua, Assistant Director of Investor Relations And User Engagement at CoAssets, to share with us about P2P (peer-to-peer) lending and what to look out for if you're considering to take up P2P investments in your portfolio.
What are P2P lending platforms?
In recent years, P2P lending platforms like CoAssets, FundingSocieties, and MoolahSense have picked up amongst retail investors and more people are learning about this alternative form of investment.
P2P lending platforms help SMEs (small and medium enterprises) get financing by raising funds from a pool of retail investors. That is to say, P2P lending platforms are helping SMEs get loans by crowdfunding, so they are the intermediaries between the companies and retail investors.
Traditionally, only accredited investors can participate in these debt-financing investments because of the risks and complexities involved. P2P lending platforms open up this investment type to retail investors. Having said that, here are some points that you should look out for before jumping onto the bandwagon.
Consider both risk and reward
For every investment, there are risks that you have to bear for the potential rewards. Low-risk investments like bonds and savings accounts are backed by institutions, and you'll get a low yield of around 1% to 3% interest per annum. As we move into higher yield instruments like equities (stocks) and REITs (real estate investment trust), investors should also be wary that these assets carry greater risks.
P2P investments are highly risky, and in the past years, they have been able to generate around 8% to 10% interest per year. Particularly, P2P investments are at risk of defaults, so one of the key considerations is the default rates on P2P lending platforms.
Having said that, past performance is not an indicator of the future. Investors have to consider both the potential upsides as well as the downsides before investing.
Know what you're investing in
While it may be convenient to do P2P investing because the platforms do the first round of due diligence before listing projects, you should still make an effort to find out more about the projects before participating. There are projects across many different industries, which means that there are different market potential and different levels of risk.
Also, the loan terms differ across projects, and there are also different types of guarantees for the projects. These will affect the chances of you getting back your money if the companies default on their loans.
As a service provider, P2P lending platforms will help to follow up on defaults. Nonetheless, as an investor, it is your duty to be selective of the projects to invest in.
Consider the types of projects on P2P lending platforms
All P2P lending platforms offer a similar service but what sets them apart are the types of projects that they finance. For example, CoAssets have projects that involve movie production and property development.
You may have a preference or may be more familiar with particular industries. So, look out for the markets that the various platforms specialise in.
The bottom line when you do any investing is to do your homework and know the risks involved. While P2P lending platforms offer an alternative form of investments for investors, it's still important to pick up other investing concepts like portfolio allocation and risk management strategies.
Summary of Event
Besides learning more about P2P investments during this personal finance session, 5 lucky participants also walked away with a $20 Starbucks card each when they signed up with CoAssets on the spot. If you're interested to attend our next session, follow us on Facebook to be the first to hear about our upcoming events.
Also, look out for more upcoming articles about P2P investing. We'll be launching a comparison tool that features P2P lending platforms like CoAssets . Stay tuned!