Growing Your Wealth in New Zealand
For investors in New Zealand, there is a range of investment options to explore. Two of the most prominent are traditional bank lending and the growing popularity of peer-to-peer (P2P) lending. Both provide savvy investors with the opportunity to grow their wealth, but they have varying pros and cons.
The Familiar Foundation
Considered the bedrock of investments, traditional bank lending is a common feature in financial portfolios worldwide. Options can range from savings accounts to term deposits. They provide welcome security knowing you are backed by a government guarantee that protects a portion of your funds, making them a popular choice. However, they don’t provide a high return but give you quick access to funds. Stability in traditional bank lending means you can take calculated risks while investigating adding a higher return on interest option like P2P.
Understanding P2P Lending
P2P lending disrupts the conventional financial model by cutting out the middleman – the bank. Rather, online platforms link borrowers directly with lenders. The platform facilitates the loan repayment process, collecting instalments from borrowers and distributing them to investors. MoneyShop helps others achieve their goals by providing them with a lending service whereby individuals look for loans to be funded by investors. People who wish to make a loan are assessed to ensure they comply with lending standards. Investors can then purchase these loan contracts.
Interest Rates: Potential for Higher Returns with P2P
For many investors, there is a sense of security regarding traditional bank deposits and term deposits, though the drawback is that their interest rates can be low. While these rates may offer stability, they often struggle to keep pace with inflation. With an economic climate like what we experience today in New Zealand, there is excellent potential to gain high returns with P2P lending.
Platforms like MoneyShop connect you with borrowers, meaning you can earn a share of the interest charged on the loan. Based on the borrower’s creditworthiness and loan terms, returns can fluctuate, with many providers advertising returns of 8% to 12% per annum. At MoneyShop, we offer investment returns from 8.25% p.a and provide monthly payments to investors, regardless of whether the corresponding payments have been received from borrowers.
Loan Terms: Flexibility vs. Consistency
There is a definitive advantage regarding loan term flexibility when it comes to traditional bank loans. Investors typically can pick from fixed repayment terms that span over a few months to several years, meaning you can shape your loan to your personal financial goals.
P2P may provide less flexibility and is unique to each service provider. If you envision specific investment outcomes, this can pose setbacks. This is because the borrower predetermines loan terms, and you may have a narrower range of options to choose from.
Liquidity: Easier Access to Cash with Traditional Options
Liquidity is the ability to convert investments into funds quickly. This is a vital part of any financial strategy. Traditional bank deposits and term deposits are known for their levels of liquidity. Normally, you can get your money back on very short notice, providing peace of mind and flexibility in managing your finances.
P2P loans are usually issued for a set term, and withdrawing your funds before the loan matures can be challenging. Some P2P platforms offer secondary markets where you can sell your loan to another investor, but there are likely to be charges, and you won’t always be guaranteed to find a buyer.
Weighing Security in Traditional vs. Diversification in P2P
There is a significant advantage to traditional bank deposits and term deposits because they are considered low-risk investments. Suppose the bank enters difficult times or goes under financially. In that case, the government always insures deposits up to a specific amount, serving as a welcome safety net for any would-be investors.
P2P does pose risks, but the rewards are far more significant. If borrowers fail to pay back what is owed, you may lose the initial investment amount. A way to lower this risk is to diversify your investment portfolio.
Credit assessment tools quickly evaluate borrowers’ creditworthiness, while a ‘loan shield’ program may be offered to cover a percentage of any defaults. While these strategies do provide a blanket of security, they do not guarantee complete protection against loss and are dependent on the provider. Rest assured, MoneyShop has never missed a payment to an investor in over 30 years.
Choosing the Right Path
The best investment choice rests on your unique financial goals and risk tolerance.
Here’s a breakdown to help you decide…
Choose Traditional Lending if:
- You value security and a guaranteed return on your investment.
- You appreciate a well-established system and are a risk-averse investor.
- You place priority on accessing funds and liquidity.
Choose P2P Lending if:
- You are looking for higher returns on your investment.
- You value control and prefer to choose individual loans.
- You do not mind the risk in exchange for greater rewards.
Additional Considerations
- Do your research: Before undertaking any investment, thoroughly investigate a company’s credit assessment process, particularly regarding P2P. Look at the protection provided for investors and the company’s track record. Banks have stringent borrowing and lending conditions. Qualifying for a loan can be problematic, especially for young borrowers or those with poor credit histories. They are also heavily regulated institutions, offering a sense of security for your investments. P2P lending can be a viable alternative for borrowers who might not qualify for traditional bank loans. The platform’s credit assessment processes can be more flexible, allowing access to credit for a broader range of borrowers. This can be appealing to investors seeking to maximise their returns.
- Diversify your investment: Don’t concentrate all your funds on one company or traditional bank. The same applies to spreading investments across numerous assets, such as P2P, property, and conventional securities.
- Start small: Especially in the P2P lending space, learn more about the platform and how to better manage your risk.
P2P Lending FAQ:
The FAQ below are those written from the perspective of a potential MoneyShop Peer-to-Peer investor in New Zealand. We advise seeking independent financial advice whatever provider you might choose.
Q. Is P2P lending growing?
Yes, P2P lending is projected to expand at a compound annual growth rate (CAGR) of 27.6% through 2029 largely due to its efficiency, accessibility and streamlined process.
Q. How are borrowers evaluated?
Each borrower is assessed to ensure they comply with MoneyShop’s lending standards.
Q. What types of borrowers seek P2P lending?
Borrowers are those seeking a personal loan (e.g. car loan, debt consolidation, home renovations).
Q. What fees are associated with P2P investments?
There are no fees for investing with MoneyShop.
Q. Who manages the loan?
MoneyShop manages the loan on your behalf. You don’t have any contact with the borrower, and we take the responsibility for recovering the payments.
Q. Are the returns from P2P lending taxed in New Zealand?
Yes, the returns are considered taxable income. MoneyShop pays the withholding tax on your behalf.
Q. What happens if I need my money back before loan maturity?
You can place your account on repayment at any time, however repayments are dependent on the length of each individual loan.
Q. How do I get started with peer-to-peer investing?
Simply contact us to get started on your investment journey.
Takeaway
P2P and traditional lending are some of the investments you can consider putting in your portfolio. By so doing, you can enjoy higher returns potential through P2P while maintaining a secure foundation with established alternatives. Remember, diversification is essential. It helps minimise risks while enabling you to achieve your financial goals!
Put Your Money to Work
We understand that smart investors like you crave opportunities. Explore our investment options, learn more about P2P lending, and start building a portfolio that works for you.
Don’t settle for low returns – invest smarter with MoneyShop!
