Thinking ahead – Real life example

Posted By on March 7, 2017

I had been made redundant. The pay out disappeared rapidly and finding a job was proving difficult. I was forced to do Temp work just to put food on the table. When I had work, times were good but holidays, with no pay quickly taught me I needed to have some strategy to save some of my income for the lean times. On the advice of my (recently fired) finance consultant, I had increased the insurance cover on my superannuation. Without regular wage contributions, the balance was going down. I needed to find some way of investing my money in irregular small amounts, other than my stupid banks so-called “high interest account” which was not keeping pace with inflation. I still had shares on the ASX but the market was at an all time low but I was sure it would pick up later.

To be perfectly honest, I had resigned myself to the fact I was financially screwed but on a whim, I Googled, “investing small amounts” and came up with several search results. Of course there were the usual obvious scams like “Christchurch Mum buys Ferrari after one month…” and Forex ads where you pay $5,000 for a course to show you how to lose $50,000 a week. But one was something I had never heard of ; Peer to Peer lending.

It’s where a group all put in a small amount into a pool that is loaned out to people, much the same as the banks do, with personal loans. The difference is, there’s no banking corporation with branches, staff and super rich executives dipping their sticky fat fingers into the honey pot, taking out profits before you get to see them. The organisers take out a tiny fee and you get the rest.

P2P lending is something the banks don’t want to become common knowledge and here’s why:

Let’s say you put $25 into an investment account at the bank:

  • You’ll get around 3% to 4% interest per annum (per year). If we work on their top rate of 4%, that’s 0.33 % or a third of 1% per month. In the first month you will have your $25.00 and interest of $0.0825 or 8 cents because they round it off. You’ll have an account balance of $25.08.
  • Meantime the bank will lend your $25 at anywhere from 16% to 10% on a personal loan. We’ll assume the lower rate of 16%. That’s 0.013% per month. In the first month they will make 35.5cents on your money but only pay you 8 cents, keeping 27.5 cents, over twice as much as they pay you. Sadly most of that 27.5 cents will go to people who are already wealthy – shareholders and corporate honchos.

Let’s take $25 and put it into P2P lending :

  • Your $25 will be loaned out at a rate of anywhere from 9.9% to 39.9%, depending on the level of risk you choose. Let’s be very fair and say you are extremely cautious and go for the lowest risk at only 9.9% (that’s 0.825% per month). That’s 20.6 cents interest in the first month, so your $25 will earn $25.20.
  • A service fee will come out but it is around 2 cents, leaving a balance of $20.18

So already you are ahead of the banks by 10 cents. It might not sound much but that’s 10 cents every month compounding at 9.9% (rather than 4%). There’s the trap – very few people understand compound interest. We usually see it working against us and seldom understand how it works when it’s in our favour.

Using the bank example, at 4% interest, after 5 years your $25 would become $30.52.

That same $25.00 put into P2P lending at the lowest rate of 9.9% it becomes $40.93. And don’t forget that was their lowest rate, at their highest rate it would become over $177.00!

Just like I discovered with the Finance Advisers, superannuation funds and investment trusts, the killer in any investment is the people all taking their fees and commissions out of the investment before you get it, usually at the input end. This reduces your small investment before it’s even invested!

I decided to try one note – a $25 share in a loan but first I needed to see if they were legitimate. And this is something I suggest you do too:

  1. Google for “complaints with …..”, “problems with ……” and “Is ….. a scam?” I found nothing alarming, just others asking the same questions.
  2. Send a question to their contact or help page contact and see how long they take to respond. This is important because if something goes wrong, you want help fast. Shady schemes rarely employ customer service staff and will reply only by email. I spoke to a human in New Zealand too!
  3. Find their business address.
  4. Read ALL of the Terms and Conditions. Even if it takes several days, you need to know there’s nothing concealed in the fine print.

The next step was to invest a small amount, just to see if it worked as well as they claimed.

I decided to try one note (as they call a share in a loan) at $25.00. That went well, within 24 hours my account showed I had invested in one note. I called their help centre again with a question and the attendant was very helpful. He saw I had bought one note and explained that if that one loan went bad, I was totally exposed, Whereas if I had 5 notes and one went bad, the interest on the others would cover my loss and conserve my investment outlay. I was waiting for the close, “would you like to commit to…” but it never came. There was no sales pitch, just the simple explanation.

That week I was able to buy another nine notes – I was on a Temp contract at the time. The next month I saw the repayments coming in, exactly as promised. They took tax out and withheld it as arranged, so what I was seeing was all mine.

Since March last year, I have squirreled away another 52 notes at $25 each. Eleven notes have been repaid early (there’s no early payment penalty) and the funds have been reinvested. Along with the repayments, I have reinvested, I have 61 notes in action today. That’s not much for almost a year but I’ve had an operation and three months off work since then. If I take the average of the monthly repayments, I need 107 notes before it starts snowballing – that’s my next target.

Considering what a crappy year it’s been, financially, I have still built my investment portfolio. I couldn’t have done that any other way I know of.

About The Author is the online voice of a collection of consumer advocates working independently to represent people who would otherwise be unheard. We speak for those who are bullied by corporations and don’t realise they can have a say.


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