Chances are you’ve heard of P2P lending and if so, you’ve probably heard of RateSetter and you might have even dipped your toe. Well, after 9 months some pre-cautions against Covid-19 where interest rates were halved, interest rates are now back to full interest.
The other half of the money was diverted to the provision fund – a common purse that soaks up the individual losses on bad loans so that your earnings are not affected. Contrast this to ZOPA and FundingCircle where I have experience (in the old days) of having people borrow money and bugger off with it to never repay it (in some cases by dying).
RateSetter on the other hand has always had this provision fund and a share of your interest is paid into it and it smooths out the bumps along the way.
What about my lost interest?
Sadly you don’t get it back. The cut in interest does depress returns but remember:
Return Of Capital is more important than Return On Capital.
Socialism Gone Mad?
Well, the cut in interest rate back last May caught my eye and I for one supported it. It would bolster the provision fund before you end up in a situation where there’s a run on the P2P lender – like has been seen at FundingCircle with long delays on getting money out. I’ve wasted a lot of time being bothered about a few bad lenders – this type of socialism helps you sleep at night.
RateSetter a tight ship?
I have always been impressed with how simple and well organised RateSetter is and they have weathered the storm quite well and from their press release they say “The Interest Coverage Ratio as at the end of December 2020 stood at 101% (up from 92% in November) and the Capital Coverage Ratio 180% (up from 166%). In light of the Interest Coverage Ratio returning above 100% for the first time since the pandemic it was agreed to end the interest reduction. Since its drop (to 74%) following the pandemic outbreak last March, the Interest Coverage Ratio has risen above 100% thanks to the interest reduction itself, the performance of the consumer portfolio and portfolio sales that have been executed ahead of expectations.”
I would suggest that it is a prudently run business and towards the safer end of P2P lending. You may lose money and you are not covered for any losses. There is no such thing as a free lunch either.
Hey GFF, should I invest in RateSetter?
Yes and no, the word is invest (not save) and I’ve found it to be a useful way to put money away. I only have about £100 in at the moment but at the peak I had £60,00 (thanks to an Interest Only Mortgage). Rates are quite low at the moment at between 3.0% and 4.0%. If that’s of interest to you, then you should think about it. I intend to run down my account and close it – it’s not worth the hassle.
There is tax to pay on interest received but you have a savings allowance from the HMRC and you can invest through and Innovative Finance ISA if you wish.
Come on – be explicit, Yes or No?
You want me to give RateSetter the GFF Seal of Approval? Sadly, without a “refer a friend” bonus, I can’t give you any clear cut self-interested financial advice.
Also, RateSetter since being gobbled up by Metro Bank isn’t even open to new accounts – so even if you wanted to, you can’t!
Good luck, GFF