An obvious solution would be to take out a personal loan. Personal loans are short to medium term loans extended to you by the banks and other non-bank lending companies. The mechanics are pretty simple.

The lender provides you the money to spend now, on the basis that you repay them not only the entire amount borrowed but also an additional amount (called the ‘interest’ payment) over the following months or years. That additional amount you pay is the cost of borrowing that amount.

That cost of borrowing will depend on whether you have something to put as a security for the benefit of the lender. For example, say you take out a loan for buying a car. If you agree with the lender that they could take possession of the car if you missed any of your repayments then that car is the security. Alternatively, you could take the loan amount and not provide anything back as security. The former is an example of a secured loan and the latter an unsecured loan.

Clearly, the latter case is more risky for the lender. The risk being that you don’t repay the borrowed amount and/or the interest and they are left with no recourse. In the former case, they can take possession of the car and sell it to recoup the borrowed amount.

For that reason, you will find that the cost of a secured loan today will range between 8.95% and 13.95%. On the other hand, the cost of an unsecured loan can vary between 6.99% (with Harmoney) and 17.95%.

To make this more explicit, if you were to take a $15,000 personal loan for 3 years, you could pay anywhere between $477 and $513 a month for a secured loan, or between $464 and $542 a month for an unsecured loan. As obvious as it is, this means that if you shop around, you could save about $1,300 on a secured loan and about $3,000 on an unsecured loan. Not bad for starters!

Be wise, shop around before you commit to borrowing.

Nonetheless, you could get even wiser about your borrowing decision.

Say you have a home loan (with a mortgage on your house) already. If you have paid down enough of your loan it may very well be possible that the lender may consider topping your loan up with the additional dollars that you are looking to put to immediate use on a car or a holiday.

Why would this option be much wiser?

That’s simple! The cost of borrowing on your home loan is lesser than the cost of taking a personal loan. To put that into context, home loan rates today range from 4.39% for a three-year term at ASB, to 4.85% at other banks such as Westpac, Kiwibank, Co-operative Bank etc.

Clearly, at these rates, it is far cheaper to borrow the additional amount you want using a home loan top up rather than via a personal loan. Given that your home loan has your house as security, it is reasonable to compare the difference in costs with equivalent ‘secured’ loans. Under the home loan top up option your monthly repayments will be anywhere between $445 and $450. Over three years that is a saving of $2,300!

You can compare all your borrowing options right now, right here on PocketWise.

The post Two ways to get wise about taking a personal loan appeared first on PocketWise.

What is P2P lending?

Most people will at some point in their lives, need to take out a loan for various reasons, such as buying a new car, doing some home renovations, or splurging on a fancy wedding. Usually, the first place we’ll go is straight to our bank (or some finance company who’s ad we saw on TV). In this case, the bank (or finance company) will lend you some money, which you will eventually pay back with interest. You are the borrower.

In a P2P lending scenario, the money you need is actually provided by other individuals, who may have some extra savings they’re looking to invest. These people could range from Uncle Richie who’s happy to dip his toes into this form of investing, to larger wholesale investors looking to diversify their investments and (hopefully) earn a higher return. In short, the money you receive is made up of lots of smaller chunks invested by lots of different people.

Who manages the P2P process?

With so many people potentially involved in a single P2P lending transaction (all the Uncle Richie’s investing small amounts, and you receiving the money), there needs to be a place that can manage the entire process, keep track of the repayments by the borrower, and payments to the investors. This is where P2P marketplaces come in.

Companies such as Harmoney and Squirrel Money are P2P lending marketplaces, where borrowers can apply for loans, and investors (Uncle Richie) can pick and choose which loans they’d like to invest in. The marketplace will carry out the necessary ID verification and credit checks to determine the credit worthiness of the borrower before the loan enters the marketplace. Although this concept is relatively new compared to the traditional route of going to the bank for a loan, these companies are licensed by the Financial Markets Authority (FMA) to provide peer-to-peer lending services, so trust or security shouldn’t be too much of a worry.

What are the benefits of P2P lending?

• Firstly, applying for a P2P loan can be done completely online, and in some cases, your loan can be funded in a matter of hours.
• Lower interest rates. This is where technology kicks kicks a*$. Because the P2P lending marketplaces operate digitally, they don’t have any branches or overhead compared to the big banks. This means that for borrowers with excellent credit scores, you can usually get a much lower interest rate from a P2P marketplace, than from a bank. Harmoney’s unsecured personal loan interest rate starts at 6.99% for A1 graded borrowers (excellent credit worthiness), compared to 13.95% from some of the banks (ASB, Westpac). On a $20,000 loan for one year, you’ll save $1392 in interest (not taking into account fees).
• Better loan management. Harmoney and Squirrel Money offer a great online platform to track and manage your P2P loan.

What are the cons of P2P lending?

• If you like to have a face to face chat with someone at the bank, you probably won’t get this from a P2P marketplace.
• Borrowers with bad credit history can find it difficult to get a loan approved in P2P lending marketplaces due to their strict screening process. If you do get approved, P2P marketplaces can sometimes offer higher interest rates. This is because the marketplaces need to protect their investors (Uncle Richie) and offer them a higher return for the additional risk of funding your loan.

Thanks for that, PocketWise. Where do I start?

If you’re looking to borrow from a P2P marketplace, Harmoney and Squirrel are the only licensed marketplaces in New Zealand. Make sure to compare personal loans to make sure you choose one that suits you. If you already have a loan and want to see if you can save money elsewhere, take your free financial checkup today.

If you have any questions that we may have missed, flick us a message on our Facebook page and we’ll try our best to answer it.

That’s all folks!

The post The lowdown on Peer-to-peer (P2P) lending in New Zealand appeared first on PocketWise.