Wednesday, 7 October 2015

Getting the Best Rate at Ratesetter



If you haven't looked at the peer-to-peer lender RateSetter yet, you might be missing a great way to hold cash. I'm not the only one to say so: as their web site proudly claims, it was voted best peer-to-peer lender by Which? readers.

I have recently introduced my son to this way of investing cash. It took a bit of explaining but he's got it now. And we both recently lent our cash out at a rate of 6.3%. Here's how to get the best rates.

Holding cash is an important part of any investment strategy: it provides a stable base for your portfolio while - hopefully - earning a stream of interest. The problem recently has been to find somewhere to put cash that gives an attractive return. That's why I first looked at peer-to-peer lending as an option to traditional bank accounts and bank 'bonds' (i.e. multi-year bank deposits). I still have some old bank bonds that are yielding 5-6% but those haven't been available for years.

I made my first tentative investment in Ratesetter in 2013. There were (and are) other peer-to-peer lenders but at that time Ratesetter had an innovation - the Provision Fund, which was meant to cover the inevitable small level of bad debts. The website also impressed me with its ease of use: money could be paid in from a debit card and lent at the touch of a few keys on the laptop keyboard.

My main reservation is the lack of government guarantee: unlike the High Street banks, if something goes seriously wrong, you don't have any guarantee that you will get your money back. But two-and-a-half years later I am still with Ratesetter.

Although the Ratesetter website is informative and relatively easy to use, there are a couple of tips I would like to pass on as a result of explaining it to my son.

Lending

Although you can opt to lend for periods between one month and five years, I will focus on obtaining the best rates for five-year lending. Once you are up and running, you set the rate you want on what is called an 'order' (you can have multiple 'orders' at different rates). Set it too high and your money will remain sitting on the sidelines; set it too low and you miss some additional interest that might have been possible.

The good news is that this five-year period (or shorter periods, if you prefer) is not as restrictive as it might at first appear - you do get a lot of potential access to your money during that period, as I describe below.

Repayments

When you lend money, you receive it back in three ways:

  • monthly interest (regular payments)
  • monthly repayments (regular payments)
  • early repayments (irregular payments - sometimes accompanied by an email notice)

So, unlike a traditional multi-year bank bond, your initial loan does come flowing back to you almost immediately, in a combination of regular and irregular payments. In theory you could create a portfolio of loans of different maturity (i.e. different loan periods) to allow even more flexible access to your money.

There is even a 'Sell Out' function for you to make a quick exit if you need to, although you may lose some interest doing this.


The Holding Account

Every lender on Ratesetter has a Holding Account, which you can think of as being similar to a current acount; the cash in it just sits there and earns no interest, until you you give loan instructions or 'orders'. That's where your initial deposit starts out. Its also where you can opt to receive the loan interest and repayments.


You can set up automatic monthly withdrawal instructions to sweep everything in your Holding Account into your bank account.

Reinvestment instructions

The important point is how you deal with the interest and loan repayments. You have a number of automatic options you can set up:
  • reinvestment at the current market rate of the interest or the capital or both
  • payment into your Holding Account for either automatic withdrawal (to your bank account) or manual reinvestment


If you don't have a lot of time, or the urge to tinker, the easiest option is automatic reinvestment. However, although that will get you a good rate of interest, it won't be the best rate that is achievable. The key insight is that the market rate is constantly fluctuating in response to supply and demand.

When you are registered and get onto the lending screen you are able to see the whole of the current 'market' - lenders' and borrowers' 'orders' ranked according to interest rate (in steps of 0.1%). (I can't seem to give a link to view this function.) Where the rates coincide a contract is automatically created.

The rate at which deals are done regularly spikes above the typical 'current' level of interest - particularly overnight. So, if the 'market rate' is showing, say 5.9%, you can look at the levels of loans offered at slightly higher rates and position yourself for a short-term rate spike (say at 6.2% or 6.3% in this case).

Because a lot of lenders do take advantage of the automatic reinvestment option, you can usually leap-frog them and get a better rate in this way. In my experience I have achieved these higher rates within a day or so.

This is what I explained to my son; he's now a savvy Ratesetter!

Good luck!

Update 7/10/15: My son - under his own steam - just invested some more of his savings and got 6.5%!


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.

3 comments:

  1. Not sure your repayment info is quite correct. There is also the 1 year loan paid at term, which doesn't fit in to your options list. Thanks for the mention of this in the past though, very happy with it.

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  2. Hope you got the £50 Friend Introduction bonus each.

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  3. Have been tempted by Ratesetter, though a bit concerned about the lack of FSCS protection and the lack of ISA eligibility, although these issues may change in the future of course. A more subtle point is that the quoted rates assume reinvestment, which has the advantage of allowing a portion of the sum to track (hopefully) improving interest rates, but also means that this portion is committed for the full five-year (or whatever) term, from the reinvestment date onwards. If this fits in with your plans, that's fine, but it's something to be aware of.

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