Tuesday, 5 March 2013

Portfolio Buy: RateSetter Peer-to-Peer Lending

The latest purchase for the portfolio is an alternative to a cash savings bond, as the rate of interest on these is no longer attractive enough.

So, for the first time, I am stepping into the world of 'peer-to-peer' lending. This is a way of borrowing and lending money that bypasses the High Street banks - individuals lend to other individuals, with a company providing the credit checks and collecting the repayments for you.

A word of warning, however: this use of your hard-earned cash is not guaranteed by the government, although the companies involved are regulated. After all, no-one can force the borrowers to repay the money they borrow from you.

I have looked at peer-to-peer lending before and filed it away under 'too risky/too unreliable'. However, I like the novel approach that RateSetter takes. Other lenders tell you to expect a small amount of bad debts or late payments. However, RateSetter has instead put in place a Provision Fund which is intended to deal with the infrequent incidents of non-payment. Although they point out that this does not amount to a guarantee, as such, they note that every lender has - so far (according to them) - received what they were expecting, in terms of interest and return of capital.

What is more, the website is very easy to navigate and the on-line activity is surprisingly transparent. Lenders choose their target interest rate and lending period (up to 5 years) and the amount they want to offer; they then join a queue of lenders at that rate and wait for the software to match up the money available with the lenders looking for a loan - you can watch the process in (almost) real time. You can also elect to have this money automatically re-lent at the future current 'market rate' or have it returned to your 'holding account'.

Borrowers are typically people buying cars: the default rate is miniscule.

It is easy and quick to register and transfer cash (with a debit card, for your first three deposits) - I was up and lending in a day. There is even a function to withdraw interest at regular intervals to give you an income. As with savings bonds, you normally would not have access to your capital over this time - although it is possible to get it back at the cost of lower interest payments (which would defeats the object of trying to get better returns). So make sure that you won't need the money for the period you tie it up.

The prevailing interest rate is set by demand and supply. Currently (early March 2013) the 5-year interest rate is hovering around 5.6%, much higher than available in any ordinary savings bonds or even Cash ISAs. But this return carries risk, so I am only investing a portion of my cash savings.

Of course, any income is liable to income tax, so you should consider your overall tax position. If you are a taxpayer, this sort of return is available for many securities in a Stocks & Shares ISA - tax-free.

[Lending rate for 5 years: average 5.65 %]



I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

8 comments:

  1. Hi Moneyman,
    I have been looking at these sorts of investments (Zopa, Funding Circle, etc) for some time although not taken any steps toward signing up just yet (not ready yet).

    I'm glad you mentioned the tax element... is the interest paid tax gross as such, or net of basic rate deductions... for instance, would a tax return be required for these types of investment / loan for basic rate tax payers that dont file one at the momment ?

    Also is there a maximum you can lend through any single or collective peer to peer lending scheme that you are aware of ?

    Interested in reading your experiences with this in future :)

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    1. Hi Nigel,

      I can only talk about RateSetter:
      - The interest is paid gross, so would need to be declared if you are a tax-payer.
      - There is no maximum loan amount but there is a max of £25k for borrowers.

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    2. By default, maximum exposure on Zopa to any one borrower is £10. I would echo all the caveats about no guarantees, but with a large enough deposit (e.g. £1000) I'm satisfied the risk is sufficiently spread to give me confidence that I shouldn't have too many defaults.
      Unfortunately, others are also looking to peer-to-peer lending, and there has been a significant drop in the "market rate".

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    3. Understood - but losing £10 on £1000 is still 1%. What I like about Ratesetter is that they have tried to minimise the risk of loss with their Provision Fund, which all lenders/borrowers contribute to.

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  2. Hi Moneyman.

    I have been using Ratesetter as a lender for just over a year now.

    I only used the Monthly and Yearly lending.

    At the time, Monthly = 4%, Yearly = 5%

    I stopped lending Monthly quite a while ago as the rate has dropped to less than 2%.

    The last of my Year Bond loans will mature at the end of this month.

    Some of my Year Bond loans repaid early. I assume because of falling interest rates they repaid and then re-borrowed at a lower rate.

    Therefore I feel that as a lender you have the worst end of the stick. If interest rates are falling, it difficult to lock in at a high rate due to early repayment. If interest rates are increasing, you are locked in at a not competitive rate.

    However, I cannot fault RateSetter as a company and feel they have the best business model.

    Good Luck.

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    Replies
    1. Thanks Anon - useful info.

      Quite amazing how rates have moved - but with less UK QE they should move up again.

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  3. I actually registered with Ratesetter months ago but haven't yet used them. I had decided that I'd try them only if the 3 yr and 5 yr rates stayed higher than 5% and 6% respectively, (c.f. recent retail corp bonds) and of course, the second I registered, the rates dropped!
    Yes, it's a pain knowing where to park cash these days and get more than the mafia rates in the banks.
    In the event, I've decided to wait and see if the NS&I offer a new i-linked cert in the next financial year. Fingers crossed!

    Steve

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  4. I personally like it when people repay after a few months as the interest earned gets less each month so ideally after a few months I prefer to get paid off and a fresh loan started. The closer the start of the loan the more interest earned! Win!

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