Canadians love debt. It’s hard to argue with the facts. Earlier this year, Canadians with debt (myself included with mortgage debt) hit a new, all-time high: credit-market debt including mortgages, consumer credit and non-mortgage loans grew to 163.3% of disposable income, up slightly from 162.7% in the previous quarter according to our friends at Statistics Canada. You can read here about some facts and history related to household to income debt. For comparison purposes, in 1980, “the ratio of household debt to personal disposable income was 66%”.
A ratio of 163.3% means households owe, in aggregate, more than $1.63 for every dollar of disposable income. Simply put, most of us spend or owe more than we make. Is it all bad? Maybe not. For many young professionals this is just a rite of passage, they are expected to be in some debt as they pay off student loans, establish their careers, homes and families. In other cases, I suspect some folks are in well over their heads.
There are traditional, brick-and-mortar solutions to debt financing, but a newer Canadian kid has recently hit the block, offering to remove the middleman from the lending process and allow lenders to generate income in the form of interest, which can often exceed the amount interest that can be earned by traditional lending means (such as from saving accounts).
Welcome Canadians, to Peer-To-Peer (P2P) lending from Grouplend.
I recently got a chance to chat with Grouplend senior management about their company and what they are offering Canadians, and here’s their responses to my questions.
First of all, why is Peer-To-Peer (P2P) lending a decent way to borrow?
It’s fast and it’s easy and it’s affordable – pay off your credit card balance and work on other debts thereafter with a loan from us. Our platform simply brings credit worthy borrowers together with investors seeking a return on their investment. Our loans are three year personal loans and the rates range from 6.3% to around 17% for the annual percentage rate (APR).
In order to receive a borrowing quote and rate you must be 19 years of age, a citizen or permanent resident of Canada, live in one of the eligible provinces, have 12 months of credit history within Canada, a minimum gross annual employment income of $30,000, and a minimum 690 FICO score. Apply in minutes, which will not affect your credit score, and you’re ready to borrow with the quote provided. There’s no set rate for everyone, your individual rate is calculated based on an algorithm associated with your credit score.
Repaying your loan is simple: provide a picture of a VOID cheque or complete a direct deposit form and automatic withdrawals are set up.
What makes P2P a decent way to invest?
We consider ourselves a very efficient and effective financial partner for the loan-funder. Since the industry is still so new in Canada, there’s really not enough data to properly discuss returns. In the US, where this industry is far more mature, the investors in loans are typically seeing high single digit returns (6 – 9%), after deductions from fees and defaults. Since we only fund prime quality borrowers defaults are exceptionally low, but that risk is still absorbed by the investor in the loans.
Based on current regulations, there are minimum requirements for capital (loan) providers in the P2P Lending industry. At the moment, only institutions and accredited investors (an investor generally has to have minimum individual income of $250,000 be accredited) can invest funds into the platform. This is likely to change (meaning the threshold of $250,000 will come down) over time, so the retail investor can come on board. This occurs in the United States with a number of P2P lenders. Another barrier to retail investors coming into the fold is the lack of national securities regulator; Canada still has a confederation of individual provincial securities regulators. Companies like Grouplend are now forcing this issue.
As a borrower or lender, is P2P risky?
As a borrower, this is not unlike any other loan or debt you owe. “Sure, for the borrower, there are payback commitments”, Sean O’Connor informed me, Director of Business Development, “and for investors there is the risk of default but we believe our loan capital investors will be very pleased with the results.”
“We’re in the simple but efficient business of pairing only qualified borrowers with investors looking for fair returns on their money to create a faster, more convenient, and more affordable borrowing experience. By stripping out the branch structure, and the legacy systems — we are able to operate with minimal overhead, further reducing the costs of borrowing.”
What about the default rate on the loan? What is the default rate investors can expect?
Again, this would be a very difficult figure to toss around given that we have only been running since late 2014. In the United States, we have observed that borrowers typically default, to some extent, around 5 – 12% of the time, but this is not indicative of total losses. Majority of these loans would typically fail further into the duration of their term, and many of them will be able to scrape out of delinquency and back to proper payments, so the total losses end up being significantly less that those numbers.
With P2P lending, are we taking advantage of the debt binge in Canada?
My answer: yes. P2P investors are but the big banks have been doing the same thing for generations. Businesses are in business after all to make money and if they don’t, they are not in business for very long. All investments have risks and I see P2P lending for the investor as no different.
In the future, I could foresee this sort of product fitting into our portfolio, the retail investor, should regulations change and loosen up. P2P has a ways to go in Canada but this type of alternative investment is gaining some traction. I know of other financial bloggers in United States who use P2P lending as part of their income stream, and I wouldn’t rule it out entirely myself.