Five things you need to know about peer-to-peer lending

1. Can I invest in peer-to-peer through my SMSF?

By Peter Marshall, product data & compliance manager, Mozo

Yes, you can invest in peer-to-peer loans through your SMSF.

Although it's a fairly new asset class it can offer you an opportunity to access decent returns but it's not without risk.

It's worth remembering that peer-to-peer loans are not considered a deposit and, therefore, they are not covered by the federal government's deposit guarantee.

So unlike keeping your money in a term deposit with a bank, if the peer-to-peer lender goes under you might lose your dough.

2. Can I reinvest my earnings?

By Daniel Foggo, CEO, RateSetter Australia

Investors can elect to automatically reinvest the principal and/or interest earned on their investment as it is received. Investors can also decide which lending market their reinvestments are made into and whether their reinvestment is at the market rate or at a specific interest rate.

Our reinvestment settings mean that investors can take a "set and forget" approach to their RateSetter investment and can minimise the time their money isn't on loan and earning interest. RateSetter offers investors the flexibility to update or change their reinvestment settings at any time in their online account.

3. How is my investment taxed?

By Daniel Foggo, CEO, RateSetter Australia

The net income earned on your loan portfolio will be assessable and will be included in your tax return.

For most investors, this is taxed in the same way as income from other investments but you should confirm with your accountant how your investment is taxed in your specific circumstances.

At the end of each year, RateSetter provides investors with a statement of the interest they have earned, net of our fees, to make it easy for investors to complete their tax return.

4. What happens if I want to withdraw my money early?

By Sally Tindall, research director, RateCity.com.au

Currently there is no option for early access to your peer-to-peer investment in Australia, but the money can be returned to you sooner if borrowers repay their loans early.

That being said, some investment options will pay the money back as borrowers make repayments rather than at maturity, so investors can often earn a regular income stream that is both interest and principal.

5. Is there a difference in return or risk if you lend to somebody who is able to secure the loan?

By Sally Tindall, research director, RateCity.com.au

In some cases, yes, and in some cases, no. It all depends on the platform you use.

Some providers let investors choose between investing in secured or unsecured loans, with different rates of return for each.

Others don't give you the choice but instead offer the one rate of return, backed by a provisional fund, which is paid by the borrower, according to their level of risk.

For more on peer-to-peer lending, grab the November issue of Money

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