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RateSetter Lending Review

RateSetter lenders review – Reviews of RateSetter peer-to-peer loans from a lender perspective. A flexible and fun way to match lenders with borrowers. Follow my step by step guide to saving with RateSetter.

This view of RateSetter is the latest in my series of reviews of peer-to-peer lending companies. I am approaching this review as lender or an investor.

Can investing with RateSetter help you beat the banks in these times of tiny to nonexistent savings interest rates?

Let’s try it and see.

If you have followed this series you will know that I have invested a small amount, £100, in other peer-to-peer lenders as a trial. I will do the same with RateSetter and see how it performs.

Setting up an account with RateSetter was a really simple, 2 minute process.

You can then either use their own website to request money from your bank account, or you can transfer money through your bank’s online banking facility into your RateSetter account.

I transferred £100 into my RateSetter account and within a few hours I received an email telling me that the money had arrived and was ready to use.

Just a note of comparison at this stage – with Zopa your money would have been immediately queued for lending. With RateSetter the money you transferred stays in your RateSetter holding account until you decide what to do with it.

This is an important plus point because at this stage you have four different investment options available.

  • Monthly. You invest your money for one month. At the end of the month your investment plus interest is returned. You can then choose to reinvest for another month, reinvest in one of the other schemes or withdraw your money.
  • 1 Year. This is the equivalent of a 1 year fixed term bond. Your money is locked away for a year. At the end of the year your investment is returned plus interest in one lump sum. There is no month by month accrual of funds in your holding account.
  • 3 Year Income. You loan your money out for a period of three years. Every month you receive a portion of your investment plus interest back into your holding account. You can choose to reinvest this in any of the four schemes or withdraw your funds.
  • 5 Year Income. Essentially the same as the previous option except the loans are for five years and typically attract a higher interest rate for lenders.

You can choose to invest all of your money into one investment option or split it between some or all of the 4 available options. For those lenders that like to micromanage their investments this is a very useful feature.

To try and compare like with like when reviewing these peer-to-peer lenders, I chose the 3 year investment with monthly returns.

The RateSetter market lending rate at the time was 4.3%. The benefit of RateSetter is that you can choose the exact rate that you offer at.

I thought 4.3% was a little low so I picked a manual rate of 4.5%. This is significantly better than the 3.8% I was lending at on Zopa.

My offer only sat waiting for around an hour before a borrower agreed it and my money was loaned out.

Here is another key difference between Zopa and RateSetter. With Zopa my £100 was automatically split into ten separate loans, the idea being that your exposure to any one bad debt is reduced. But more than likely every lender is going to encounter some bad debts with all of these microloans.

In contrast, with RateSetter my £100 was loaned out to one borrower.

In some respects this seems more risky for a lender, your entire amount is exposed if that loan turns bad. On the flip side, RateSetter would counter that they offer a safety net via their Protection Fund which they claim is more than enough to cover the expected number of bad debts.

So even if my one RateSetter loan goes bad, I should still receive the monthly instalments. The difference being that that money will be coming to me from the Protection Fund rather than the borrower.

As with other peer-to-peer lenders, you only get the indicated interest rate on RateSetter if you reinvest your monthly income.

This is easily demonstrated by looking at the payment schedule of my £100 loan.

After the 36 months, according to the payment schedule, I will have received a total of £106.96 including capital and interest.

It doesn’t take a genius to work out that this does not equate to the 4.5% at which I offered the loan.

It’s probably more in the region of 2.25% per year.

So if you were to turn off relending, the interest rate, while not too bad, is at least a couple of perentage points below the expected.

According to RateSetter, you would expect to receive 4.5% if you reinvested your monthly income every month, and offered it out on loans at 4.5%. I will need to monitor this over the months to get a better idea.

Just on the topic of reinvesting, RateSetter have a really nice feature where you can choose what happens to your monthly income from each of the four investment options. For each separate investment option, you can choose to have relending on or off, you can choose to reinvest to the same option or any of the other three options, and you can choose whether to offer loans at market rates or a fixed rate of your choosing.

This is an outstanding feature for micromanaging investors.

Edit: Having logged back in to RateSetter about an hour later I was a bit surprised and disappointed to find that the current rate for 3 year loans had jumped to 5.3%. In just an hour it had changed by nearly a percentage point. That’s going to be a lot of interest I’m missing out on, but that’s the chance you take.

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