Peer-to-peer lending in Singapore can earn six times more than the CPF Ordinary Account. But this risky investment is not for all Singaporeans.
Disclaimer: The content in this article is provided for information purposes only. It is not intended to be and does not constitute personalized financial advice or any other advice. It is general in nature and not specific to you. Speak to a wealth manager or financial planner before making any kind of investment.
Recently, the Straits Times published a piece about First Asia Alliance, a peer-to-peer (P2P) lending site that left investors burned. Some lost as much as over S$100,000, funding companies like a mushroom farm.
As times move on, P2P lending is likely to become a more popular and viable part of the industry. But how can we keep safe?
What is Peer-to-Peer Lending?
Peer-to-peer lending is a concept that took off sometime in 2005. Many companies got tired of borrowing from banks - the process was long winded, and often required at least a two to three year record of profits (something many new companies do not have).
These companies turned to the internet. P2P websites allow people from around the internet to loan these companies money. For example, say a company requires S$200,000 for an important expansion.
Ther are not many Singaporeans who would be willing (or can afford) to part with such a huge sum. But over the internet, if they can find 200 people willing to lend them S$1,000 each, they’ll already have the sum they need.
In return, these lenders or investors receive repayments with interest from the company. The interest rate given to investors is extremely high - in some cases, these exceed 20 per cent per annum.
This is about four times the annual payout of an insurance policy and six times more than the CPF Ordinary Account.
The investors do run the risk that the company will be unable to pay back the loan.
However, if everyone involved has only loaned a small amount (in this case S$1,000), it is not as bad as losing S$10,000 or S$50,000 on a poor investment. Many investors have each loaned a small amount, so in the event of a loss, all the investors also only lose a small amount.
Some peer-to-peer lending websites in Singapore include CapitalMatch and MoolahSense. These provide an opportunity for those with spare cash to grow their income, while helping local businesses to grow. This has indirect benefits to our economy, such as boosting employment.
Done right, P2P lending is helpful for all parties involved. It is quite possible that, in the next 20 to 30 years, P2P lending will replace one specific function of banks (that of giving out small loans).
In Europe and the United States, P2P sites lend money to individuals as well as businesses. In Singapore, P2P sites mostly just loan money to businesses (this is less risky).
How Can Singaporeans Safely Invest in P2P Lending?
Always speak to a wealth manager before making any kind of investment. P2P lending is not for everyone. In general, it will appeal to younger Singaporeans, in the mid-20s, who need to focus on growing their wealth.
P2P lending is not so great for retirees or the elderly, as they should be more focused on protecting their wealth.
Key things to keep in mind are:
1. Make P2P a Part of a Larger Portfolio
A balanced portfolio has a mix of low-risk assets (with low returns), and high-risk assets (with high returns). P2P lending is a high risk, high return investment. It is best used in balanced amounts, to offset the low returns from other assets like Singapore Savings Bonds (SSBs) or fixed deposits.
P2P lending is a high risk, high return investment. It is best used in balanced amounts, to offset the low returns from other assets like Singapore Savings Bonds (SSBs) or fixed deposits.
The right balance is different for each person, as everyone’s financial needs are different. Speak to a qualified wealth manager for specifics. As a rule of thumb however, high risk assets such as P2P investments should not take up more than 10 to 15 per cent of your portfolio. For example, if you have S$10,000 to invest, you should not have more than S$1,000 invested in P2P.
2. Spread Out the Investment Over Several Companies
A P2P site will have a list of companies in which you can choose to invest. Try not to put all your money into a single company.
It is less likely that every company will fail to repay you or be liquidated. If one company fails to pay you, the other two or three you invest in may do better.
Note that at present, only First Asia Alliance seems to have had problems with the companies it listed. Among other P2P websites, the worse incident we’ve seen so far has been one company restructuring its loan (that means it possibly pays less, or over a longer period).
3. Do Not Invest Your Savings
Do not put your emergency fund or other savings in P2P. Savings and investments should be kept separate.
Once you have invested the money in P2P, you cannot take it back out - you have to wait while the loan is gradually repaid. This means you should never put in money that you may need on short notice.
If you do not have any savings, then build up six months of your income in savings, before putting money into P2P lending or other investments.
Alternately, you can use a personal loan for your P2P investment, if you can get one with a low interest rate. If you've done your homework (see point 4), the returns from the investment should make up for the interest paid for the loan.
4. Do Not Gamble with Your P2P Investment
Pay close attention to the details of the various companies you loan to. Ask about their outstanding debt, their expansion plans, and check who owns it. For example, does the owner have a big stake in it, or does the owner just want to rip off investors?
Verify what you’re told with other people in similar industries. If you cannot understand the business, you may want to reconsider investing.
Do not invest in businesses the way someone would pick lottery numbers (e.g. You like the name, the registration number is “lucky”, you have a “sense” of good fortune)
5. Invest Only What You Can Afford to Lose
When companies in First Asia Alliance faltered, we noticed some investors had put in spectacular sums, with amounts like S$100,000. This is not the way P2P lending should be used by the layperson.
Part P2P lending’s advantage is that you can invest small amounts. The idea is to have hundreds of investors pitch in small amounts of S$1,000 to S$2,000.
If you do have several hundred thousand dollars that you’re willing to invest, we suggest you engage in a private conversation with the company instead. Forget peer-to-peer lending sites.
Otherwise, limit your potential losses. Any amount you cannot recoup within a month or two is too much.
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