If you’re looking to get into the Peer-to-Peer lending game (otherwise known as P2P), you may have heard of Ratesetter. In a nutshell, they take your money and loan it out to individuals in the form of unsecured loans. The rate of interest you’ll receive is dependent on the market rate, and the term of the loan you have chosen. One fascinating thing about the system is that the prevailing interest rates are set by supply and demand – rates have been known to be super-depressed or alternatively way too high (although anomalies are ironed out pretty quickly).
Ratesetter is perhaps one of the biggest passive products you can get in the P2P field. Once you have set up your account, the options are there to turn on auto-lend, which means that your funds are always queued for the markets you have chosen. When you get repayments from individual loans, these too will be put back into the queue. The upside of this is that you have to do no work at all – in theory, you could leave your account alone after this. The downside is that you will be at the mercy of the market rates. If for some reason they are extremely low, the auto-bot will not care, and your money will still be queued.
Having said that, Ratesetter is still one of the better choices if you have no P2P products at all. There are many aspects which suit the first-time investor well. They are well-established in the market, having being launched in 2010 – that is ancient by P2P standards. Their product is very easy to understand – it’s simply personal loans, and no other knowledge is required as the background checks have already been done by them.
The initial investment is low – from £10, and the product can be housed in an Innovative Finance ISA, allowing you to save tax-free. More importantly, diversification has already been done for you. If you invest £10,000 into the platform, your money doesn’t go into one loan but rather split across multiple contracts. As time goes by and repayments are accrued and invested back, you end up with a whole load of smaller contracts. Looking at my account there isn’t any loan which takes up more than 7% of the total and most are for much less.
Ratesetter also offer another layer of protection in that a Provision Fund operates to compensate lenders from capital loss. At present this has worked seamlessly to the extent that nobody has lost a penny of capital so far, but this should not be relied upon as a cast-iron guarantee for the future. A recession could see the fund depleted in a relatively quick period of time.
Ratesetter offer just three markets for you to invest your money: the Rolling, a 3-year and 5-year. As you may expect these offer slightly different rates of interest (typically 3/4/5% at present). Crucially though, only money invested in the Rolling market can be withdrawn early with no fees. If you have invested in the other markets, then a fee is charged to access your money. The exact fee calculation is not particularly transparent but seems to range from 1%-3% – either way you lose a large chunk of your interest already earned. Therefore, thinking ahead and planning your future needs for money is very important.
My Experience With Ratesetter (Correct as of 2018)
I’ve got few bad things to say about Ratesetter: they have functioned as promised and interest has been steady on my investment. There have been some rather dubious episodes in the past year, such as Ratesetter acquiring other businesses as a result of loans gone bad and some other poorly judged loans, but to their credit they have taken the hit instead of letting the Provision Fund do it.
I have had no need to withdraw, so locking my money into the 5 year market is no problem for me. I always return money to my holding account and on the occasions I did put a withdraw it has been rapid. Funding can be via debit card, which means you can be up and running in minutes.
If anything, the platform suffers from too much popularity – the key symptom of which is that interest rates are low. I am loathe to invest on the 5-year market at under 6%, and this figure usually pops up if you are happy to leave it some weeks. Recently, however I have not seen this at all, and as such I have added no new funds in here for a couple of months. I feel the auto-invest option is not optimal as sometimes ultra-low rates can happen, and you may inadvertently take these.
It seems to me that as a personal loans originator, Ratesetter are far ahead of the most comparable alternative (Zopa) which offers lower rates and no Provision Fund on equivalent loans. Whilst I don’t fully trust in the Fund (it may become obsolete in a downturn) outside of a bank I feel the platform risk (the risk of the platform going bust) is one of the lower ones in the market.
One of the things I don’t particularly like is that the rates use a little bit of sleight of hand to make them look better than they are. A 6% rate on the 5-year market assumes that you re-invest all your interest for that 5-year term. So for a £10,000 investment, you won’t receive £600 a year like one would expect. If you are investing for income (that is, to withdraw interest regularly and leave the capital in), it would be prudent to knock off 1% off the headline rate to compensate for this.
Currently, Ratesetter are running an improved offer for new customers: invest £5,000 and hold it there for a year, and get a £100 bonus. This effectively boosts your return by 2% for the year, meaning that if you can hit the 6% rate in the 5-year market (unlikely at the time of writing) your returns on this adjusted for the risk are probably better than virtually all P2P investments.
Disclaimer: I currently hold an investment in Ratesetter. Peer to peer lending carries a degree of risk, so please do your own research. This revew is not intended as advice and only reflects my personal opinions.
Pure Passive Investor. Always looking for ways to make money (but not myself) work harder.