It hasn’t even been 12 months and I’m withdrawing every cent I can out of P2P lending.
The mystique of P2P lending and the “cool kid” mentality surrounding this hip new investment have long since faded and I’ve become completely despondent with the investment option all together. Sure, it has it’s merits as part of a portfolio. Sure, it beats low returning bank deposits for it’s interest rate returns. Sure, it “helps” everyday people in need of cash. But P2P lending has downsides and for me these far outweigh the benefits.
Before we jump into why I’m jumping out of P2P investments, lets rewind the calendar and go back to mid 2016 and discuss what I was thinking when I decided to put $1000 cash into P2P lending as an experiment.
I’d first come across P2P lending on radio and billboard advertisements when ever I’d done odd trips in the weekends in the car or commuted to work. Several different marketplaces had opened up and I’d become interested and more curious than anything about this new trendy investment (note curiosity and trendy don’t make for good investment decisions). I completed the sign up process in less than a day by uploading my passport and filling out a few basic fields such as my bank account number and address.
I was then ready to invest into the murky world of unsecured personal loans!
So off I went, “investing” into people that wanted to consolidate debt, others that wanted to add a new car to their garage or some that wanted to take the kids on their dream overseas holiday, all charged out at a lovely 12-35% interest rate for their troubles. I was hooked I thought. These idiots are getting loans at 30% and that is all going straight into my bank account. What could be easier?
I soon learnt the grass isn’t so green on the other side. As my auntie once said, it’s more than likely greener over there because the cows and sheep are shitting all over the field adding manure to the soil.
So why am I so against P2P lending and why am I withdrawing all my funds (albeit very slowly)
- It is fully fixed income so I’m taxed on all of my returns.
- It is very Illiquid and getting money out of it is a lengthy process
- I can earn the same or higher returns on stock index funds with much less time and expertise input from me
- I’m not sure how they will cope in a recession
- I simply just don’t enjoy personal lending
- I feel deeply unethical about lending to people for holidays and cars at 30+% interest rates knowing it is not helping their financial situation
- It is just one more added thing and stress to my life. I want to simplify my investments, not complicate them.
I’m taxed fully on my investment returns:
My annual return on my P2P loans is hovering around the 11% mark. Not bad! Most people would be pretty happy with that. However… I’m only seeing a bit over 7% return after taxes are taken into account. Ouch! Not so great after all. Because it is fixed interest, it is treated as income and hence taxed at a very hefty income tax rate where I live. Capital gains on the other hand aren’t taxed at all. Hence my preference for other stock and property type investments.
Getting cash out is slow, I mean really slow
As the loans are set up for either three or five year time frames, I’m getting my investment back very slowly. I get a little bit of interest and an even smaller bit of principal back in each monthly payment. For some people this is fine, but life changes quickly. Miss Health and I may want to buy another investment property or our own home. If I’m locked into a five year investment and there is no way to withdraw the funds, then tough cookies.
Stock index funds earn similar or more returns for far less effort
I absolutely have fallen in love with stock index funds. After my experiences with stock picking, I have grown to love their simplicity and the returns they offer. Over the longer term, index funds average around a 10-11% return. All I have to do is click two buttons on my online banking once a month and the funds transfer across to my fund managers account and I’m instantly invested into the S&P500. Easy! With P2P lending, I have to login, re-invest my funds when interest and principal repayments come due and select the loan(s) I want to invest in. Why bother, when all I have to do is put it in index funds and let the money work its magic.
P2P in a Recession?
Currently P2P lending has only really hit mainstream in a bullish upwards market. They didn’t have to ride out the recession of 2007/2008 as they really only came to the fore a few years afterwards. Sure returns of double digits are possible now, but what happens when a recession hits and your loans start defaulting because borrowers lose their job and can’t afford to pay off that 15% loan for a new car? You lose the cash, not the P2P platform, not the borrower, YOU lose the cash. This can significantly affect your returns. Especially if you are lending to higher risk/higher interest rate loans.
P2P Lending just doesn’t float my boat
I’ll admit it. I don’t find peer to peer lending very stimulating at all. Picking out one debt consolidation loan from another or funding someone else’s used car purchase against the next person is just not what I want my hard earned investment dollars put into. I’d prefer it to be put into real estate which I can see, feel and add value to. Otherwise index funds, which invest in productive businesses that provide electricity, transport, food and clothing for people. I want to invest in productive economy and community building companies and buildings, not just someone trying to buy a holiday they can’t afford.
The ethics of P2P lending don’t sit well with me
Allowing people to borrow my money for buying overseas holidays, purchasing a new or used car or adding to their mountain of debt just goes against every frugality trait in my body. I cringed when I would open up the potential loans people needed and the purposes for borrowing. I wondered what the person would look like and how desperate they are to get these sort of loans.
I was there, lining up to fund it. Essentially promoting wasteful spending and profiting from it. You could argue that investing into companies such as banks, weapons manufacturers and other such companies is no different. But I felt an immense difference as I was funding these loans one by one, a basket of $25 at a time. This was the mean reason I had a dislike for P2P lending shortly after my $1000 was fully invested. I just couldn’t sleep at night and live with myself putting my fellow citizen deeper and deeper in personal debt. I’m fully aware that if I’m not going to fund their loan, the next person will, but at least I’m not personally contributing to this downward debt spiral anymore.
I want to keep my finances simple and not complicate things
We have already got rental properties, index funds and superannuation funds invested. I’ve stopped stock picking for the added stress it caused me and getting out of P2P lending was for similar reasons. P2P investments in the bigger picture of our portfolio was only ever going to be very small time, yet it took up a lot of my thinking space and daily anxiety thinking about the investments. The aim with our portfolio is to keep things simple. Having one less asset class and one less thing to think about, monitor and file was one more thing we didn’t need. We are actively trying to fit less into our lives to appreciate downtime, relaxation and rejuvenation after our careers have taken a more front seat in our lives. P2P was an obvious target to get rid of.
So in summary
Peer to peer lending is something you may want to try if you are wanting to diversify your investments outside of the traditional bank deposits, corporate/government bonds or property and stocks. However, for me it was only ever going to be a very small fish in a larger pond and the time and effort just weren’t worth it for me. The ethical side of things was a very big part in swaying me to exit P2P lending soon after joining.
I don’t regret my little experiment, I’ve learnt a lot about how the investment works and if anything decided that it just isn’t for me.