RateSetter risky?

sanfairyanne

RateSetter is currently offering rates of around 3.2% for lending money via peer to peer loans. This rate allows the lender to access their money without fees. There’s a much better rate approaching 6% for those prepared to lend for five years while accepting a fee for early access. As someone wanting to hold some funds available as cash the fee free rate of 3.2% is interesting me. It’s much better than sitting in my Hargreaves Landsdown account doing nothing while I wait for stock market opportunities.

I wonder if others here use P2P services and consider it wise. If not why? Or indeed are there other services that I should look at?
Many thanks in advance

msallen

I use P2P on a variety of different platforms (but not as much as I used to, and I haven't used ratesetter for two or three years since bagging the free £100 offer they often run).

However I would never consider it as somewhere to hold funds that I might want to access quickly "for stock market opportunities" as even the "instant access" variety can take a number of days to get the cash back into your bank account.

Also NO P2P is risk free. There is some risk to all types, and whilst the interest rate you earn should theoretically be a guide to the comparative risk, its not usually quite so straightforward. You can probably be fairly sure that an individual loan offering ~16% on huddle is higher risk that a black-box fund like ratesetter's offering ~3%, but things are not so clear cut when you compare loans/platforms with more similar headline rates.

Personally I generally tend to steer clear of P2P at the very lowest rates (under say 5%) as I don't feel they offer enough premium over secure cash deposits to cover the risk they involve; and at the very highest rates (above say 12%) as many of the platforms offering the highest rates don't have the recovery expertise required to do all the recoveries required from defaulted borrowers.

aroominyork

Ratesetter is marketed to look like a savings account so you need to clearly understand what is under its p2p hood. You should also recognise that some p2p platforms have already run into serious problems even before the sector has been tested in stressful market conditions.

This is what might happen. You are waiting for stock market opportunities (thinking you can time when to buy). So let's say you can identify the bottom of a bear or crashed market when stocks are cheap. The economic circumstances which led to that are also causing increased repayment defaults on RS, the provision fund is buckling under pressure, there is a pooling event (make sure you understand what that means) and few investors are putting money into RS. Bottom line... you do not have instant access to your money.

So go in with your eyes open. I have thought it through and have part of my cash in the one year market; only time will tell if that is sensible.

Alexland

I don't believe investing in a potentially illiquid P2P investment in order to take advantage of stock market dips is a very good strategy.

I think you would do better holding your cash in a genuine cash account (easy access or 1-5 years fixed term if appropriate) and invest the money that is not required for at least 5 years into an appropriate S&S asset allocation. Then if you see an obvious stock market dip that you want to take advantage of you could always temporarily increase the risk profile of your S&S investments by as much as you feel comfortable.

Alex

GiddyInvestor

The beauty of Ratesetter should be that barring fraud within the company the investors’ money would be covered by the provision fund. Unfortunately, the recent trend towards a lack of transparency means I simply don’t trust them sufficiently. They made a mess up with motor loan investment a couple of years ago and a similar repeat loss could wipe out the performance fund. As an investor I simply don’t know what’s coming around the corner. Also, it has to be remembered that the accounts for the motor loan company are apparently now 7 months late.

Personally, I have reduced over the last 6 months from 30k plus of investment to 50 pounds. To re-enter it is not so much as seeing high interest rates as a demonstration that the PF is steadily increasing to an acceptable level. It has apparently improved over the last 2 months but I need it to be closer to the target (I think now 125%) to reinvest along with more transparency.

masonic

GiddyInvestor wrote: »

The beauty of Ratesetter should be that barring fraud within the company the investors’ money would be covered by the provision fund.

That's no longer correct. See https://www.ratesetter.com/invest/investing-with-us/provision-fund for an explanation of how the provision fund now works.

The provision fund has coverage based on expected default rates. If actual default rates turn out to be higher than predicted, then interest and capital are at risk. In the example given, if default rates were twice that expected, a proportion of your interest would be lost. If default rates rose to four times what was expected, then capital losses would be incurred by investors. Another point is that "experts" who set their own rate higher than the market rate are at an advantage over those who invest automatically at market rate, since risk is shared between all participants in a market regardless of the rate they are earning.

It's well within the realms of possibility that in a recession default rates would be several fold higher than they are now, and Ratesetter has slightly under-predicted default rates even in these economically favourable conditions.

The provision fund coverage ratio can go up or down from the point you invest to the point your loans repay, and has been on a downward trend for some time now. That means the risk of future losses has been getting higher.

I'm willing to hold money in the 5 year market at >6.4%, but wouldn't risk my money for less when there are better opportunities elsewhere.

sanfairyanne

Thanks for all the replies, you give me much to think about.

Snow_Dog

I echo the previous comments that P2P is not somewhere to keep money you want instant access to.


It is also not as safe as money in the bank.

sanfairyanne

Thanks, I’m going to put £1000 in the 5 year section at 5.8% with a £100 bonus after 5 years. A friend is linking me to this and he will get £25. So he owes me a beer. I’ll just have to think some more about using my cash. One would think the UK markets likely to be volatile in the run up to Brexit, so if I hold on to cash until the end of October I might find some opportunities arise.

Snow_Dog

I think if it were me in your position I would more go for the 1 year which is about 4.5% at the moment. Then in 1 year you get £145 in promotion and interest and could then look to see if any others are doing a similar promotion. Just keep racking up 10-15% returns per annum on your initial £1K.
Just make sure you set your reinvestment on Ratesetter to be high so it doesnt auto reinvest and it will drop right out into the holding account.

Alexland

If it's only £1k you are risking then, provided you can afford the potential loss, the signup bonus makes the risk/reward profile attractive. We did it for the same reason then closed the accounts after a year.