Institutional backing gets blame for high rates

Before peer-to-peer lending launched in the New Zealand market, providers said its interest rates would represent a drop in cost for borrowers and an increase in income for investors.

While investors are pulling in rates that are much better than they could get on a bank term deposit – Harmoney’s average return is just under 12% for lenders – borrowers are not paying much less than they could get from a bank.

The highest-grade borrowers are paying just over 12%, up to almost 40% for those with an F credit rating.

Harmoney recently increased the interest rate it charges borrowers.

Squirrel Money charges from 9%, Lending Crowd charges from 7.9% and LendMe charges between 6.64% and 15.04% but requires security - often a property.

Claire Matthews, of Massey University, said the platforms were facing a number of issues.

“It may reflect a greater reliance on institutional lenders than expected, which may be more expensive than retail lenders would be. It may also indicate they are lending to riskier borrowers - so the rate offered to an individual borrower may be lower than they would get from a bank, but for the total portfolio the average may be higher than the average for a bank's less risky portfolio.”

A Harmoney spokeswoman said it structured its rates in a way that was most fair to borrowers and lenders.

“Harmoney does not itself charge or earn interest, but grades and prices risk for lenders to choose from. In pricing risk, we take a neutral position,” she said.

She said unlike the bank approach of a flat interest rate for all credit card borrowing, Harmoney used a gradient of 30 risk grades.

“Rating for risk as Harmoney does is the more fair approach, in our view, but banks have a vested interest in protecting their high returns from interest paid by credit card borrowers, which means their rates do not accurately reflect risk.

“In the Harmoney marketplace, each loan application is attributed a risk grade with an associated interest rate according to Harmoney’s credit scorecard. The interest rate on a loan is both the interest rate paid by borrowers and the gross interest rate due to lenders.”