•  How peer to peer lending works
• What you’ll need to provide during a borrowing application
• What you’ll need to provide if you want to start lending
• Information on Lending Hub’s credit grades (we’ll be processing borrower details to determine a credit grade for each borrower)
• How to create the best possible loan listing (for borrowers)

Check http://lendinghub.com.au/Info/Personal_Loans.php early next week for an update.

We are designing Lending Hub to be a truly online platform for matching borrowers and lenders rapidly without any of the hassles of a physical bank. To achieve this requires a high degree of automation and development of our compliance systems, which is where our focus has been for the past 2 months.

Secure Automated Processing

We are aiming to achieve virtually all processing of borrowing and lending applications online in real-time.  The Lending Hub system will check and process a borrowing application within less than a minute (assuming you have a traceable credit history and have provided all required information). Now instead of waiting at a bank or searching for your nearest branch we’ll be able to process your details in less time than it takes to grab a coffee!

If we require any physical documents (e.g. payslips or bank account statements) you can upload a scan directly to your Lending Hub account. No need to mail us anything (unless  you really want to of course).

Compliance

Australian legislation is quite explicit in the requirements for consumer loans, if you intend getting a loan (from any lender not just us) then check out The Uniform Consumer Credit Code at http://www.creditcode.gov.au/. This code is designed to protect consumers by clearly defining the terms of a loan and the loan agreement.

To meet our compliance requirements under the UCCC our loans agreements will be available for reading by the anyone prior to entering into an agreement or starting a loan listing on Lending Hub. This level of transparency is relatively unheard of in Australian financial services (after all how many banks do you know that show you the fine print before they process your application?). In addition we’ll clearly stipulate our fees and your obligations under the agreement.

No early repayment fees!

Most lenders in Australian will charge you if you want to repay your loan early…yes, that’s right! if you are a good borrower and have the money to repay early they penalise you with complicated formulas and more fine print.

Lending Hub personal loans will let you repay early the principal and interest you owe at any time (assuming you’re not behind on any repayments of course) without any additional fees or penalties!

Launch

At this stage we are trialling p2p loans with a private group of borrowers and lenders and except this will clear the site for launch in either August or September 2008!

We’ll keep you posted in the meantime with some interesting topics.

Lending Hub Team

When assessing the effective cost of a loan, you will need to consider a few possible charges and not just the interest rate. Other costs and charges can include bank fees and up-front or settlement charges. The comparison rate (also called Mandatory Comparison Rate or MCR or the Effective Rate) is an interest rate calculated by the lender that lets you compare the total cost of a loan between products and lenders. This total cost is expressed as an annual interest rate.

The Comparison Rate is calculated using a financial repayments formula that takes into account the amount and duration of the loan, the repayment frequency (e.g. weekly, monthly) , the interest rate and any fees and charges levied on the loan. As fees and charges set by lenders can vary between customers and products the Comparison Rate will help you compare many different types of loans, although it is important to remember that the cost or interest on a loan is just one factor that you should assess in determining whether a loan is suitable for you and will meet your needs.

Other factors that may increase the effective cost of a loan but are worth considering include the flexibility to repay early or redraw or the level of documentation required to obtain the loan.

Lending Hub’s P2p Loans

Lending Hub will provide Comparison Rates on all loans listed on the Lending Hub once we go live. The Comparison Rate is required under the Consumer Credit Code and the calculation for Lending Hub loans will include:

• The maximum interest rate as set by the borrow or average interest rate as set by lenders
• Settlement fees
• Any other fees we may charge to the borrower (currently nil)

Costs that are excluded are:

• Government and statutory fees
• Fees and charges that are event-based and may or may not apply throughout the life of your home loan, e.g. Late payment fees, redraw fees or early repayment fees

More Information on Comparison Rates

For more information you can visit the following sites that provide further information:

• www.creditcode.gov.au/content/downloads/factsheet.pdf
• www.creditcode.gov.au/content/mandatory_comparison.htm
• http://www.theage.com.au/business/money/tools/guides/banking/compare_rates.html
• Understanding Credit Comparison Rates (WA)

The inability of many non-bank lenders to obtain funding for their loans means that there are now few competitors to the traditional banks (Wizard has been reported to be up for sale and RAMS was bought by Westpac last year). In addition the banks are now putting interest rates up to maintain their margins and profitability on loans at the consumers expense.

Combine this with the meteoric rise in petrol prices, increases in the underlying cash rate (which drives up the rates on home loans), static or falling house prices and increasing inflation and you get a fairly dire picture for many consumers across Australia,

Currently a consumer who wishes to borrow has fewer choices than say 1-2 years ago and at a much higher interest rate and given the credit crunch most banks would be looking to restrict whom they lend to (even if this means not lending to a potentially good borrow but with an unusual history).

What is the credit crunch?

This was originally driven by a rapidly rising level of borrower defaults and falling property prices in the US market which led to significant losses by lenders. This then led to a loss of investor confidence which has struck both equity and debt markets making debt (principally for businesses) hard to obtain and often at significantly high interest rates.

Opportunities for borrowers

I suggest that even though loans are more expensive and harder to obtain that you shop around your home loan or whatever loan you are looking for before signing up to anyone. Make sure that you compare rates (you can always use the Mandatory Comparison Rate that each lender is required to provide by law to do a quick comparison) and ask each bank to give you a better deal. There’s no harm in trying after all!

Peer to Peer Lending Blogs

• http://www.peer-lend.com/
• http://www.p2pnobank.com/
• http://www.rateladder.com
• http://www.wiseclerk.com/
• http://www.onlinebankingreview.com.au/

US Based Peer to Peer Lenders

• http://blog.prosper.com
• http://blog.lendingclub.com/
• http://blog.us.zopa.com/

Get informed and read up about social lending before you start borrowing or lending and you’ll see that peer to peer loans are starting to become quite commonplace in some parts of the World

How is all of this usually financed in Australia? Plastic credit or credit cards or revolving unsecured personal loans (store cards also fall into this category) …everyone uses to a greater or lesser extent and now many Australians are once again getting sucked into the trap of spending a lot to maintain a costly lifestyle and paying for it with future earnings using credit cards.

Things you should be looking to do to keep the plastic credit monster at bay included both looking at better sources of funding and keeping a tight control of you expenses. Here are some things you can do now to help yourself:

• Start using the credit cards that offer low interest rates on purchases with an interest free period
• Keep a weekly budget so you know what are the essential items you need to spend on and what’s a luxury
• Plan ahead for special purchasers and check out the sales (remember as we possibly start heading into an economic downturn retailer begin to discount!)
• Consolidate multiple credit cards. In particular get rid of those very expensive store cards that give you some side perks e.g. free fuel but charge you through the nose on purchases
• Pay off those credit cards each month on time, this way you won’t have to pay interest fees each month on top of your regular credit card bill

There are also other ways to live to reduce your dependency on plastic credit, how about paying in cash once again? You’ll see the cash line dwindle at the ATM every-time you make a withdrawal which can help discourage spending.

Hopefully these tips will help you get through the Easter holiday period in financial health.

‘Til next time.

Lending Hub

Online Communities

An online community is also a marketplace, whether it be a market for goods (such as eBay and Oztion.com.au in Australia) or the market for people selling and buying cars (such as Drive.com.au) or in this case the marketplace for money. Lending Hub is essentially a market where we match lenders (i.e. people with money) with borrowers (i.e. people who need money. The important factors that drive online communities is the ability to match people across distance or time and to provide them with ample choice which is often called liquidity or critical mass. The connection in this case is a mutual service and benefit to both the lender and the borrower.

What Connects the Lenders and the Borrowers?

The lenders have a different set of interests and expectations when they use a peer to peer lending site as compared to the borrowers. Lenders are looking for a few things which can be summarised as:

• an opportunity to make a decent return on their investment
• a transparent and easily manageable investment
• control over whom they will lend to
• control over the dedired level of ‘risk’ compared to the expected return

The borrowers on the other hand are looking for:

• successful acceptance by the bank/institution that they can borrow
• a low interest rate
• transparency around the terms of the loan
• ease of application

Lending Hub connects the borrowers and lenders firstly through an anonymous platform (using screen-names) and allows lenders to bid against borrowers’ loan listings. The social aspect is through the element of the loan listing and the auction process…essentially this is a dynamic marketplace for borrowers to auction their need for funding to lenders at the lowest rate possible. This kind of competitive environment is very similar to eBay and other auction sites and provides both an entertaining medium in which to conduct a transaction but also creates an unparalleled level of transparency in a single platform.

Peer to Peer Loan Groups: Additionally the social and community element connecting lenders with the borrowers is around online groups that can help to give lenders confidence that the borrower is a reliable person and has obtained approval from his or her peers.

We expect here at Lending Hub that the peer to peer loan community will take awhile to fully develop however we believe that this will be driven by the value that both borrowers and lenders obtain from the basic purpose of the social lending platform…to match people with money to those who need money and to do so safely, securely and in a fair manner.

Next blog will discuss the credit card industry in Australia.

1. Can you clearly explain for what purpose you will use the loan funds
2. Are you honest and willing to disclose information about yourself
3. Do you demonstrate an ability to manage your personal finances

When you start applying for loans (personal loans, home loans, business loans etc) you need to have a simple and easy to understand reason for needing a loan. The answer could be something like “I am currently working as a technician however I want to start studying at university part-time and require funds to pay for tuition fees”. This simple and clear rationale lets a lender know that the money will be spent for a purpose and serves to improve your life in some way.

For a bank or financial institution to part with their money they will want to be certain that you will repay the loan and the primary guide is how much information you are willing to tell them about yourself. The more info you give them about your past (in particular how you explain any credit defaults or late payments) is a clear guide as to how you will behave yourself in future and your reliability as a potential borrower.

The final point in demonstrating an ability to make the required monthly repayments is based on several factors including how much you currently earn, any debt you already need to repay, whether you have a history of defaults (or even bankruptcy) and also how you manage your personal finances. There are many people who live financially sound lives even though they carry significant amounts of debt…the trick is in how you prioritise repayments and live within your means.

When you go and apply for your loan remember to take with you the following:

1. Personal identification forms (e.g. passport or drivers licence)
2. Payment slips or tax returns as proof of income
3.  Details on other loans or credit cards and also any assets you own
4. Reason for wanting a loan

Hopefully this summary of what you need to be a good loan applicant will help you get that loan.

Best wishes to all loan applicants!

What is Risk?

Risk is the volatility (and associated probability) of an investment, for example, if you invest $100 in blue-chip shares you might find that in any month the price of these shares might rise or fall by say $2 or $3, however if you invest in some small cap mining company the price might jump by say 20% or 30% fairly regularly.

How does Risk Apply to P2P Loans?

An investment in a loan has a unique risk profile…either the borrower repays the loan and the lender gets the agreed full interest rate or the borrower repays late or defaults (cannot pay all of the loan back). P2P loans have a risk profile similar to bonds or other fixed-interest notes where the key decisions for the investor are:

• What is the likelihood that the borrower will be late or default on repayments?
• What is the interest rate that I need to apply to this loan to offset the additional risk?

Hence a sensible investor in a P2P loan will need to apply a higher interest rate to ’risky’ borrowers (measured by say a lower credit grade or poor level of information disclosure) to recoup expected late repayments/defaults.

Diversification is Critical for Online P2P Lenders

An investor placing funds into person to person loans should consider the impact of placing 100% of the investment funds into a single loan. If the borrower repays the loan the investor gets exactly what was promised, however if their is a default then the investor less than what was promised. To overcome this asymmetric relationship an investor should always diversify their investment portfolio across a number of loans. The greater the diversification the lower the risk of losses from any single borrower.

Online P2P Borrowing and Lending Platforms

How does the rise of online loans and online P2P borrowing and lending platforms affect the principles for lenders? The exact same principles apply i.e. it is extremely important to assess what is the right interest rate per loan and then to create a diversified portfolio of loans. The benefit of online lending platforms is that they allow you to make quick investment decisions in real time and to invest small amounts in each loan (say $100 at a time) thereby creating a loan portfolio comprised possibly of 10-20 small investments.

If you are interested in further reading on risk and investment risk-return relationships you should check out the Handbook of Fixed Income Securities which has a wealth of financial and investment information.

The principle factors are:

• Inflation and the economy are cyclic
• The ‘credit crunch’ following on from the collapse of the US sub-prime market
• Strong economic growth in Australia and globally

The economy and inflation and as a result interest rates are typically cyclic and follow a long-term pattern that results in a variance around a mean interest rate of about 7%. We recently experienced low interest rate and low inflation rate times in the late 1990s that followed extremely high interest rates in the late 1980s. The low interest rate environment helped fule Australia’s housing boom that helped push housing up and simultaneously increased the cost of living that is then reflected in higher inflation. In an attempt to restrain inflation the RBA (Reserve Bank of Australia) has increased the underlying cash rate to make borrowing more expensive.

The impact of inflation and high interest rates is important as it tends to inhibit business growth and consumer spending (an important driver of the Australian economy) as we have today seen Kevin Rudd and the Labor Government seeking to reduce the 2008 budget by $5 billion to help keep inflation under control (higher Government spending tends to increase inflationary pressures).

The recent strength of the Australian (and global) economy has driven wage and other price increases that in turn pushes up inflation, in particular the mining and resources boom has led to a shortage of skilled specialists with high wage premiums required to attract suitable candidates. It is likely that the strength of the Australian economy will continue for a while (even though a US recession is looming which may impact consumer sentiment and spending).

The Global ‘Credit Crunch’

The collapse in the US subprime home loan market has created both illiquidity and higher rates for financial institutions, corporations and other large scale lenders and borrowers that is being directly passed onto borrowers and consumers. It is now much harder for companies to raise debt globally to fund business expansion and business activities (a case in point being the fall in investor confidence in Centro and Allco and the uncertainty around the RAMS Home Loans business and its ability to refinance a significant part of its home loan book).  Banks have experienced a higher cost to raise money which is now reflected in 8%-9% home loan interest rates and even higher personal loan rates.

What can consumers and borrowers do to minimise their credit and financing costs? Whilst the market sets the interest rates there is a great deal of variance amongst the banks, credit unions and non-bank lenders. Borrowers should shop around and compare rates for at least 3-4 lenders. It is times like these that consumers are often able to find comparative bargains just through a little legwork.