RateSetter Product Review 2016
Founded in 2010, RateSetter has 21% of the market share for 2016 P2P lending and is one of the 'Big Three' peer-to-peer lenders in the UK, alongside Zopa and Funding Circle. To date, the platform has lent £1,566,130,268 from 47,359 investors.
RateSetter reports a market interest rate, calculated each day according to the amount of available investor capital (market supply) and the amount of demand from borrowers (market demand). This equilibrium is constantly fluctuating and here at Orca Money we track these daily changes.
Investors can also try to achieve a better return by setting their rate higher than the market rate. However, this can cause delays in lending your money, meaning it is sitting in cash waiting to be lent, gaining no interest.#
Table 1: Average RateSetter Market Rates
As peer-to-peer lending is not covered by the Financial Services Compensation Scheme (FSCS), investors’ capital and interest are at risk. To mitigate this risk, RateSetter launched the first investor provision fund, designed to cover investors’ losses caused by borrowers defaulting on their loans and being unable to repay the debt owed.
Actual default rate: 0.57% (year-to-date October)
Expected future default rate: N/A
RateSetter does not publish its expected future default rate but does publish its expected future bad debt rate. The bad debt rate takes account any recovered losses following default.
The future bad debt rate for 2016 YTD is 3.43%.
Expected future losses: £18.6m
Provision fund value: £22m
As an investor, your RateSetter investment can be held within a General Investment Account. The Innovative Finance ISA (IFISA) will be available once RateSetter has full authorisation from the FCA and ISA plan manager approval from the HMRC. Currently, only Crowdstacker and Crowd2Fund have obtained both authorisation and approval, with Lending Works and LendingCrowd awaiting HMRC approval having recently gained full permissions from the FCA.
You are also able to hold your investment in a Self-Invested Personal Pension (SIPP), providing your SIPP provider accepts P2P investments. The large SIPP providers are currently not accepting P2P investments, however the following providers will accept a RateSetter P2P investment, as stated on RateSetter’s website:
- Westerby Trustee Service
- London & Colonial
- Concept Group
RateSetter Investment Products
The Rolling Market product is designed to provide you with easy access to your money as funds are invested in loans at the prevailing Rolling Market rate. Interest can be withdrawn as an income or reinvested.
You can access your money at any time, providing there are funds available in the market to match the amount being withdrawn.
Interest rate: 2.8% (subject to daily change)
Loan term: 6 months - 5 years
With this product, your funds are invested in loans with terms up to one year. Your investment and interest is repaid at the end of the loan term, however, if the underlying loans are repaid early, your capital is automatically reinvested according to your preferences. This is the default setting, which can be manually changed allowing you to take the interest and capital payment on a monthly basis.
Early access to your money is available through RateSetter's 'Sell Out' feature. This comes with an average fee of 0.72% of the underlying investment and usually takes around ten minutes, depending on market conditions.
It is important to note that if you trigger the Sell Out feature, RateSetter will offer your loan parts to other lenders to purchase. If a buyer exists and the current interest rate on offer is lower than your achieved rate, RateSetter will keep the difference in the future accumulated interest. If the current market rate is higher than your achieved rate, the deficit is deducted in favour of the new investor. This ensures the new investor is not penalised for substituting your loan commitments.
Also, RateSetter will impose a further charge if you use the Sell Out figure to access your money early. Your rate of return will be reduced to reflect the amount of time you actually ended up investing for. For example, if you invested in the 1-Year Market and withdraw after four months, you will get the Rolling Market rate.
Interest rate: 2.5% (subject to daily change)
Loan term: up to 1 year
For those seeking a more long-term investment, RateSetter also offers the 5-Year Market product. Your investment is spread across loans with terms up to five years and your capital and interest are repaid monthly.
The 'Sell Out' feature is also available with this product, operating under the same terms as the 1-Year Market product noted above.
Interest rate: 4.6% (subject to daily change)
Loan term: Up to 5 years
RateSetter's provision fund is a vital aspect of the platform's inner-workings, especially prior to choosing which product to invest in. This is because in the event of the provision fund becoming depleted, RateSetter would declare a ‘Resolution Event’. This would mean that all outstanding loan contracts, regardless of which product you have invested in, would be automatically assigned to the provision fund and all loan repayments would be assigned to the provision fund on behalf of investors. Repayments would then be shared out to investors on a pro rata basis, i.e the amount you receive will reflect the value of your original investment (if you invest £100 and a 5% loss was applied, you would lose £5).
In terms of risk, therefore, all products are essentially equal due to how the provision fund operates.
Due to the significance of RateSetter's provision fund, it is important to keep a check on the strength of the fund through its coverage ratio (the value of the fund against expected future losses) relative to their actual bad debt rate.
Given that most of RateSetter’s underlying loans are to individuals and businesses, they are unsecured and don't have the added security that comes with property loans (10% portfolio) and some large business loans which are asset-backed.
RateSetter has a strong track record of providing relatively secure loans and offers a fairly diverse range of products. However, there is a trade-off for this security when one looks at the platform’s relatively low rates of return, compared to other major P2P lending platforms in the UK.
The platform's provision fund is one of the key factors to look at when investing across RateSetter, while the platform's Sell Out feature should also be carefully considered when choosing which product to invest in.
It is also important to remember that, as with all P2P lending, there is always the risk that you could lose your capital with no protective coverage from the FSCS.