Saturday 19 December 2015

RateSetter Peer-to-Peer Lending – It can no longer be called an experiment

RateSetter logoI first dipped my toe into the Peer-to-Peer lending arena back in May 2014.  Research at that time suggested for me there were two viable alternatives – Zopa and RateSetter.  I went with RateSetter and duly deposited £10,000.

Since that first investment I've gradually continued to invest and as of today have a not insignificant £43,769 or 5% of my total wealth invested in RateSetter.  With this amount invested I can no longer say I'm experimenting.  My market of choice is the 3 Year Income market however recently I've started to move some new/repayment money into the 1 Year market and as a home purchase gets even closer I’ll start moving into the Monthly market.  My lending has so far achieved an annualised 4.5%.  A result I'm ok with.

Peer-to-peer lending has a very different risk profile to that of a vanilla savings account and given this is money I have planned for an eventual home purchase I'm sensitive to these risks.  For starters you are not eligible for the Financial Services Compensation Scheme (FSCS) which protects the first £85,000 (£75,000 from 01 January 2016) of savings so your capital is at risk.  RateSetter does offer some protection in the form of a Provision Fund which reimburses lenders (ie us) if a borrowers payment is missed.  I like to keep an eye on defaults and this fund.  When I first started investing the Provision Fund was £6,328,472 which was set against £179,536,557 of loans.  So by value 3.5% of payments would have had to be reneged on before I potentially started to see losses.

Today the Provision Fund has grown to £16,543,201 against loans of £510,819,525 so protection has been diminished to defaults of 3.2% by value.  So far in 2015 the actual default rate has been 0.55% so the Provision Fund is more than covering what’s happening this year.

Of course this year is not a year like 2008 and unfortunately RateSetter was not in business at that time so I can’t check the default rates to compare against the Provision Fund.  Zopa was however in business and they currently have a 2015 actual default rate of 0.13% and back in 2008 saw actual defaults of 4.67%.  So in 2015 it looks like RateSetter’s loan book is riskier than Zopa’s and the Zopa default rate would have more than depleted the RateSetter Provision Fund.  I’ll also make a hypothesis that if/when we have another ‘Global Financial Crisis’ (or equivalent) RateSetter will see actual defaults higher than Zopa.  This is not surprising given a quick check this morning shows Zopa 3 year loans at 3.8% while RateSetter 3 year loans are at 4.8%.  Risk vs Reward and all that.

With this in mind I found the following chart taken from the RateSetter website useful:
RateSetter default rate scenario testing
Click to enlarge, RateSetter default rate scenario testing

So a 13.7% default rate would deplete the RateSetter provision fund and you would receive no interest but no capital would have been lost.  A 20% default rate would see 5.7% of capital lost.  Given I'm achieving 4.5% in annualised interest it would be a loss of a bit over 1 years worth of interest.

With this all in mind I'm staying in the RateSetter lending game.

Peer-to-peer lending is still a relatively new investment class and I know I’m still learning.  In the past we’ve had some great learned comments from you the readers on this topic.  Please do comment below if you’re peer-to-peer lending, if you’ve stopped for any reason or if you’ve learnt anything new.

As always DYOR.

If you've done your own research and decided you’d like to undertake peer-to-peer lending, have decided RateSetter is for you and have a minimum of £1,000 to lend then if you sign up directly from this link you and I will both receive £50 within 15 working days.  That’s the equivalent of a first year bonus of up to 5% which isn’t to be sniffed at.  Of course as I've said above your capital is at risk with peer-to-peer lending so please do make sure you do your own research first.


  1. Thanks RIT - I followed you into Ratesetter, and have about 30% invested monthly and 70% invested at 3 year, giving blended rate of 4.9% and am happy with that. All reinvestment is going to monthly and final 3 year loan repaid in June 2018. Have only invested 2.5% of my portfolio which is about 25% of my cash. As an alternative, have you thought about Property Crowdfunding and have you looked at PropertyPartner? I am still trying to assess all the risks here and have yet to invest. But I can see it as an area to diversify away from equities so would be interested in your views. While you are still to buy a house, it may be a good hedge for house price inflation and there is liquidity with a resale market.

    1. Great to see someone else having success with RateSetter. Thanks for sharing Anon.

      On the topic of PropertyPartner. There are some investments that I (currently) won't invest in for ethical reasons. In the UK equity market I for example won't invest (directly, I understand trackers contain them) in guns or fags companies. PropertyPartner is a similar ethical dilemma as I believe that the current Buy to Let market in this great country is/has been given an unfair advantage enabling First Time Buyers to be out bid and prices to be ramped. This looks to be getting slowly corrected in recent times and I hope it continues. I therefore won't participate in anything that keeps UK property prices high. Allowing someone to buy a part of a (potentially geared) home will just continue bidding up houses which should be homes and not investments IMHO. Of course this is just my view and we're all different.

    2. "In the UK equity market I for example won't invest ... in guns ... companies."

      That would have been an appalling policy in, say, 1938. How do you know it isn't now?

  2. Hi RIT
    Timely post as I've just had my first P2P loan default. It was only a tiny loan and it was with Funding Circle. Like you, I also lend with RateSetter (along with some others).

    Whilst I have invested in P2P, I still consider it pretty high risk, hence don't intend on investing a lot more, although I will top up next year. Going with the likes of FC with their higher interest rates is like you say, Risk vs Reward.

    Good to see you have faith and that you are doing so well with your investments. RateSetter's Provision Fund is comforting

  3. I've been using p2p lending since 2006/7 financial year. Never had any defaults or late payments in all 9 years. It's a tiny proportion of my overall portfolio, but I've anyways enjoyed it. I had expected defaults during the financial crash but nothing happened to my loans...

    Currently moved almost exclusively into lending to small businesses, something that I'm very committed to in many ways. Like you, I don't directly invest in certain things (tobacco, sugar, gambling), so I like the fact that I can choose what kind of businesses I lend to.

    Am receiving about 8% on funding circle, 11% on rebuilding society, <4% on zopa and ratesetter.

    Have been very happy with everything over the years, and am potentially moving to increase my allocation to funding circle in the new year. I think I'd still be happy even if I'd had some defaults, because the interest on loans is so high and I'm glad to support small businesses.

    1. No defaults or late payments; well done. How long have you had investments in Funding Circle? I am very much preferring RateSetter to FundingCircle for my passive investing approach. My FundingCircle defaults were a little alarming for a while but are slightly better than expected now.

  4. I'm tempted, but there's a fair chance I'll die in the next few years, leaving my wife a problem in tidying up. Or we could do it in her name, leaving her a problem with carrying on on her own (she recoils from financial stuff). Any comments?

    1. You need some way of giving her instructions after you die (and keeping those instructions up to date). Hopefully, she has somebody she can trust who would be computer savvy enough to help her. The simplest platform for me is RateSetter and all she would have to do is to change the settings to put all returns into the holding account (balance) and set regular auto-withdraw of the balance. It should all then gradually trickle out automatically into her linked bank account as the loan and interest repayments are made until there was none left. Do it all in her name and she should easily be able to get help from RateSetter admin if needed when you die I guess. Note I am not recommending you use P2P but I think that is what I would do in your situation if you chose to.

    2. Thank you, Jim.

    3. Agreed that ratesetter is very easy to use, not a recommendation to use them, but if you were to set it up, I'm sure your wife would be able to cope, it passed my 'could my mum use this?' test.

  5. If you would like to set out a schedule of your ailments I'm sure the board will have a view as to which term is most appropriate!

    I suspect platform collapse is a risk with many P2P providers. I believe there are about 40 of them and I doubt many are that well capitalised. Expect consoidation from distressed positions or otherwise.

    I have come across ratesetter in my working life and they are a professional outfit. I think lending rates have fallen quite a bit though suggesting competition for borrowers is high. I lend a tiny bit with them and zopa but almost can't really be bothered with it.

    If one is looking for a home for long term money a well diversified equity product likely has a higher expected return and lower risk. If its short term and low risk I think one should be thinking about return of captital rather than return on capital and making more secure arrangements.

  6. You might care to take a look at the first post in the following link:

    In this post a representative of Ratesetter, WestonKev, gives some more detail about the provision fund.
    Also an interesting comment from him on Dec 12th to say that some lenders do not have the protection of the provision fund.

    Another link to the same forum which may be of interest:


  7. I found ratesetter to boring. The following is not a recommendation to invest but I have been putting money into smaller P2P sites that do asset backed loans and pay out 12%. There's enough loans and sites to get diversified.

    p2p independent forum is where I found a lot of information.

  8. RIT: presumably your annualised 4.5% return is taxable at the higher rate?

    I'm waiting until the sheltering of such incomes in ISAs comes into effect (and how much, and whether that comes off the overall ISA allowance). Until then, while P2P might be of some interest and fun, I don't think the return after tax justifies the risk and effort - particularly as we have yet to see how it works in an cycle of rising interest rates which seems probably in the offing for the UK over the next two years.