In previous article dated on 8 December 2017, we featured an article about P2P lending mechanism for borrower (Read more here). This article will look at the P2P lending from investors’ perspective.
According to the statistics from Funding Societies (Read more here), investors can earn upto 10 – 14% return p.a. The tenure of each investment could range from 1 to 24 months. The minimum investment amount is RM100.
At the current default rate of 1.35%, from total 3069 number of financing upto 20th April 2018, the lending performance is on-par or better compared to Malaysia’s February 2018 non-performing-loan (NPL) percentage, which stood at 1.6% (Read more here).
The following graph shows the historical default on quarterly basis. The default rate could go up as high as 2.31% on Q2-2016. With the default rate ranging from 1.35% to 2.31%, and at an average return of 10% per annum, is the investment worthwhile?
Source: Funding Societies Malaysia
Let’s look at the expected return for a single investment.
Expected return, E(X)
= (positive return)*(positive return probability) + (negative return)*(default rate)
= (10%)(100% – 2.31%) + (-100%)(2.31%)
= 9.77% - 2.31%
The expected return of 7.46% is still higher than the current average one-year fixed deposit rate of 4%. Investors may wish to consider to allocate a small portion of their investment into P2P lending as part of their diversification.