Ratesetter Provision Fund Info

Ratesetter Review – Part 2 – Things To Know About Ratesetter

In part one of our Ratesetter review, I talked about the frustration I have had personally when investing in Australia and looked to Ratesetter as an alternative.

Then I showed how easy it is to sign up to and start investing.

>>> If you Want to Borrow Money from Ratesetter Click Here <<<

However, many questions remained. Therefore, part two of our review aims to give you a detailed overview of how it works by answering the following most asked questions:

  • What is Ratesetter?
  • How Does Ratesetter Work?
  • How Safe Is Ratesetter?
  • How Does Ratesetter Make Money?
  • How To Use Ratesetter?

If you don’t want to read all the way to the end of the article, although we do advise it, we concluded that essentially Ratesetter has a track record which makes it a compelling investment option backed up by their “Provision Fund”.

Of course, the key word here is “invest”. Ratesetter is an investment and as such despite its promising past performance you should only really be investing money that could potentially be lost.

In the the interest of full disclosure:  I am personally making Ratesetter a part of my investment mix (I am not a financial advisor but I do like to try and make good investments).

What is Ratesetter?

Ratesetter is one of the leading peer to peer lending companies. It was originally founded in 2010 in the UK and it promises to give investors the opportunity to earn returns on their investment that are higher than a savings account.

The Australian version of the website was launched in November 2014 and it is this version of the service that we will be focusing on in this article.

How Does Ratesetter Work?

Ratesetter works in much the same way as other peer-to-peer lending companies. In case you are unsure of what this means here is a quick overview.

It is really quite simple.

When you want to invest money with Ratesetter you choose the amount you want to invest as well as the amount of time you want to invest for.

Once you have done this, Ratesetter matches you up with a borrower who needs some money and is happy with the rate. Once the borrower has your money, they spend it as they wish, paying the fees back as they go along.

Now, while this all sounds good, I’m sure a lot of our readers are wondering “What if the lender doesn’t pay my money back?”

Well, this is the really clever thing about Ratesetter. Ratesetter was one of the first peer-to-peer lending companies to use the idea of a provision fund. Ratesetter’s provision fund is made up of charges paid by the people who borrow money from the service.

The real genius behind the provision fund in my opinion is not that it exists (although this is awesome) but that the amount paid by the borrower to the fund changes based on their risk profile. In other words, the more likely they are of default – the more money charged and the bigger the provision fund gets.

All this money goes into a big pot and it is used to cover lenders if the borrower is either late with their payment or fails to make one at all.

Now, it is worth mentioning that this provision fund is nowhere near big enough to cover all the money that Ratesetter has lent out. In fact, according to their website they currently have over $70 million of loans outstanding and about $4 million in the provision fund.

It is absolutely true that if all the $70 million dollars Ratesetter currently has loaned out were defaulted on, there would be a lot of people losing a lot of money. However, the people behind Ratesetter do not believe that this is likely.

“Through the GFC, defaults on personal loans didn’t even double…” Mr Daniel Foggo, CEO of Ratesetter Australia said in the Sydney Morning Herald.

What they do believe is that out of that $70 million, only a small amount of it will turn out to be “Bad Debt”. The job of the provision fund, therefore, is not to cover the entire debt that Ratesetter have loaned out, but instead cover the amount that they have worked out to be bad debt.

According to their website, they have estimated that around $2.3 million dollars of their money is bad debt, meaning that the $4 million available in the provisions fund more than covers this.

Ratesetter Provision Fund Info

Now, it is worth mentioning that this Bad Debt estimate is just that, an estimate. The amount of actual bad debt could, in fact, be higher or lower. While they do have a 173% coverage (April 2017) of the estimated amount of bad debt, it is worth remembering that there is no guarantee the bad debt estimate will be correct.

This brings us nicely onto our next question.

How Safe is Ratesetter?

Even with borrowers under considerable stress it appears that Ratesetter is safe. This is mainly due to two reasons. Firstly, because they check everyone that tries to borrow money using the service and secondly, because of the use of their provision fund.

When people apply to borrow money using Ratesetter, they perform all the necessary checks to ensure that the person is not a credit risk. On their website, they claim that everyone who borrows using the service is:

A. Creditworthy
B. Has a regular source of income (or assets)
C. Has an acceptable credit history

Just like a bank, Ratesetter wants to decrease the chance of their loans not being repaid and as such, they will, in theory, only choose people they believe will be able to pay off the loan.

Therefore, because of the fact that they check who they lend money too and also because of their provision fund, they actually claim that at the moment not a single investor has lost any money using their service!

This is no small claim as they have been around for seven years and as seen in the figures above, they have dealt with a significant amount of money.

They are also regulated in the UK by the Financial Conduct Authority, and most importantly in Australia by the ASIC which should keep them in check.

However, as (to their credit) they are keen to point out on their website “Past performance is no guarantee of future success”.

Essentially, this is not a bank account. Like with other investments such as the stock market there is a chance that you will lose money. Ratesetter isn’t regulated by the Financial Services Compensation Scheme which means that should the worst happen, investors aren’t covered by the government.

So, what does this all actually mean? How safe is Ratesetter actually and is there a chance all that debt could be defaulted on? Well, to be honest, if I had a good answer to that I’m sure I would have made my millions by now!

Like many other financial services, the health of Ratesetter depends on a number of things including the economy around it.

The fact that not a single person has lost any money in the seven years that Ratesetter has been in operation is incredibly comforting for would-be investors. They have a large amount of money in their provision fund, more than their estimated amount of bad debt, and this has so far proven to be more than enough to offset any individual problems lenders have had.

The biggest risk would be if there was a global financial crisis again and it is only then that we will really know just how robust Ratesetter is.

Basically, as with any investment, while Ratesetter certainly seems pretty safe, only invest what you can afford to lose.

How Does Ratesetter Make Money?

Ratesetter makes its money by taking a portion of the interest paid on your investment. Currently, this stands at 10% of the gross interest received.

While this seems like a lot, the good thing is that all the interest rates shown on the Ratesetter website are the rate you will receive post fee. This means that should you sign up to their one year fund that offers 4.9%, you will receive 4.9% from Ratesetter.

As well as this, Ratesetter makes money by charging a fee to borrowers.

However, even for borrowers it isn’t that bad as the fee is simply added onto their loan and they pay it back as they pay back the rest of the loan.

Now, while all this evidence of low fees is certainly good news for investors, at the moment it does mean that the real answer to the question “How does Ratesetter make money?” is quite simply, it doesn’t!

Well, at least, not at the moment. While in 2015 Ratesetter did make a small profit of GBP 476,000, in 2016 it was back in the red with a pre-tax loss of GBP 4.9 million. Not a small amount.

Now, of course, Ratesetter say that this was part of their overall strategy. The lack of upfront fees hasn’t always been the case and in 2015 they actually charged a fee to users. This change is what they blame their losses on they now lack an upfront fee.

They do, however, claim that this will make the company more sustainable in the long run which is great news for investors if true.

How to Use Ratesetter?

Ratesetter is really easy to use. In fact, they have tried their best to make it as close to a regular savings account as possible. This means that there is a low barrier to entry for potential customers.

Much like when choosing an ISA or other type of saving account, when you invest your money you have to choose a product. Ratesetter currently offers four products.

These are:

  • 1 Month market
  • 1 Year market
  • 3 Year market
  • 5 Year market

Much like traditional savings accounts the longer you commit to leaving your money in their hands, the higher the interest rate you can receive.

In fact, Ratesetter’s five year market currently (Mar 2017) offers an excellent return on investment of 9.2%. In comparison, the one year market offers a still decent 4.9%, while the one month offers 3.4%. While this is much less that the five year account it is much more than most savings accounts can offer at the moment.

One of the great things about these accounts are the options that are available. For example, you can choose to invest as much or as little as you want (well, as long as it is over ten dollars). This means that there literally is a product for everyone.

Once you have deposited your funds, you are then free to either set your own rate or invest at the market rate. This means that it is actually possible to get more than the advertised rates as you can choose to offer your loan at more than this.

Of course, the problem is that if there is another similar loan available on the market at the market rate, it is highly unlikely that anyone will choose your loan. If your loan fails to get picked up, instead of it earning interest it will just be sat in your account.

Because of this, Ratesetter claims that most investors simply choose the market rate for their investments. Still, it is nice to have options as it does make you feel like you are in control of your money.

Once your money is invested, it will be matched to loans. Now, one thing worth mentioning is that the term time of these loans will be longer than the term time of your investment. For example, Ratesetter claim that a one month investment will be put into a 6-24 month loan.

What this means is that while you should receive your fees after your term time, if there are no funds available you may have to wait until there are sufficient lender funds to repay your loan.

Conclusion

Hopefully, this article has answered a few of the questions you may have had about investing with Ratesetter. As you can see from the answers to the questions in the article, Ratesetter seems to be a fairly safe way of getting some decent returns on your investment.

The fact that there are so many options and you can invest as little or as much as you want certainly works in Ratesetter’s favour, as does the fact that so far they claim that not a single investor has lost any money when using their service.

Of course, this isn’t guaranteed so when investing your money, please make sure that you do so only with money you can afford to lose.

Current Returns at Ratesetter

Ratesetter Review – Part 1 – Essential Reading Before You Join

Want to earn more than a couple percent in a bank account?

Me too!

Quinn AskelandHi my name is Quinn. I am a regular family guy (not a financial advisor) who has been investing since I was old enough to do so. Up until 2008 and the GFC like many others I did pretty well … but since then it seems to me like everything has been turned on its head. The stock market has gone nowhere in a decade (it was 5115 in 2006) and looks overvalued. Bond yields are at historic lows and in bubble territory. Property has only one way it can go. The interest paid by banks on your savings are terrible… and if when they do go up the rest will at best stay stagnant.

But there are bright spots in this new economy.

Recently signed up signing with Ratesetter with plans to be a part of the P2P revolution and (hopefully) some safe and solid returns.

Current Returns at Ratesetter(In coming weeks, I will review what it is like to lend money and what you can expect)

So far the returns look pretty great to me. (Rates offered 14 March 2017)

But what I wanted to know was:

  • How onerous is it sign up?
  • Once you have signed up, whats next?
  • How do you invest?

The Sign Up Process

Step 1 – Name and Contact Details

The first step is concerned with your basic personal details and is very straight forward.

Ratesetter - Lender Application

Investing Entity Details

Step 2 – Investing Entity

The next step gets into some of the practicalities like if you are operating as a business or individual, address and bank account details so you can be paid.

 

Investing Entity Details

Step 3 – Confirm

Just like opening a bank account or other account with a financial institution, Ratesetter requires that you prove you are who you say you are.

In my experience, this is where many companies make it hard. I have seen where some give you the option to FAX them – how do you even do that? I forget. Usually everything looks easy on the surface

Ratesetter seems to provide a number of options to make it simple.

In may case, option 2 was the easiest for me and I uploaded a bill which had been sent to me by email – it was very easy.

Question remains: Did the system work?

Confirm Identity - Ratesetter

Step 4 – Complete

The final hurdle … we all hope.

By now I was pretty much ready to start investing … OK yes perhaps I was a little impatient – excited to get started.

Just a few little things extra.

The PDS or Product Disclosure Statement

Product Disclosure for Ratesetter Agreement

and as you would expect – agreeing to all the stuff required by regulators, lawyers and many other people…

Terms and Conditions and Privacy Statement and

Agreeing to Terms of Ratesetter

And Then…

To this point I had spent 7 minutes including about 3 minutes getting my drivers license and the bill I had to send.

Ratesetter Welcome Message

Funny enough I missed the bit where it said, “This process is usually completely within one business day” all I saw was the phone number so I thought I would try customer service out.

The phone was answered quickly and the lady who answered could not have been nicer – especially considering she could have just said, “We take one business day to review applications” but instead said, “just a moment and I will have a look into your account” or something very similar.

Then she came back on the phone and told me I was all set.

Meantime I discover there was some emails I had received as well which explain the one day waiting period and the Quick Start Guide.

Now it gets fun!

Quick Start Guide

Of course before you begin, you need to have some funds in the Ratesetter account which you need to organise through your bank.

Meanwhile they do have a pretty well done – Quick Start Guide that is a good read. The page below is the one I found most helpful in understanding how it all works.

Quick Start Guide - Ratesetter

Final Word

To be honest, I always feel a little apprehensive whenever I fill out forms with my personal details. I chose Ratesetter because they are well established.

In general, I cannot see how Ratesetter could be much easier and quicker. It is reassuring that you can call a live person who actually seems to care and I definitely appreciate the efforts taken to make it easy.

About the only thing I could possibly quibble about is the welcome message you get after completing step four was not clear enough or reassuring enough for those who like me are a bit impatient.

Time to transfer to money to my new account … and do some meditation.

Happy investing!

 

What the LendingClub Debacle Means for Aussie P2P Lending

When the American LendingClub board fired the company’s CEO and founder in May for suppressing information about a dubious $22 million loan sale the entire Peer-to-Peer (P2P) lending industry came under a cloud including the fledgling Australian industry.

Bad Advice Comes with a PriceQuestions were raised about the reliability of data that the company publishes.

As a result, lenders became reluctant to advance funds to LendingClub.

However the company is not a fly-by-night operator. Since its inception in 2009, it has provided borrowers with over U.S. $20 billion in loans.

Driven by a business model that provides increased benefits to both individual investors and borrowers, the industry is highly reliant on trust.

But if that trust is maintained, consumers and small businesses provide in Australia provide an ideal market for P2P lenders with a high degree of internet and smartphone penetration and a tech-savvy population.

Additionally, Australia’s banking industry is dominated by the big four banks who charge customers higher rates of interest while paying rock-bottom rates on term deposits and savings accounts.

In order to participate in this opportunity, a number of P2P lenders, both home-grown and from overseas, have started operations in the country. Some of the prominent firms in this sector are Marketlend, Kikka, OnDeck Australia, SocietyOne, Harmoney, and RateSetter.

Compare them here.

If you agree that winds of change are all but a certainty, the future speed with which of P2P lending grows in Australia comes down to trust.

This trust will come from the companies themselves and as we saw during the GFC – the regulator (ASIC) will play its part.

So what does the Australian Securities & Investments Commission say? The ASIC website is quick to point out that investing through a P2P lending platform is not the same as putting your money in a deposit with a bank, building society, or credit union. The government’s rules regarding its guarantee on deposits with banks do not apply to funds placed with a P2P lender.

Investors should also consider that the recent crop of P2P may not have much of a track record in judging credit risk or recovering amounts from defaulting borrowers.

Perhaps P2P firms should be compared with owning the stock of a bank?

The LendingClub lesson for P2P lenders – trust and transparency is critical.

What is the transparency level at Australia’s P2P lenders?

There is a wide variation in the data that the country’s P2P companies reveal. While it is a fact that many of them have started operations only recently, some firms are definitely more open about their operations than others.

RateSetter, a company that launched operations in 2014 has posted detailed information about its loan book on its website. The data that it has put up in the public domain includes loan amounts, interest rates, and loan purpose. Without revealing individual borrower details it has published information regarding the age, gender, state of residence, employment status, income bracket, and homeownership status of its customers.

The company has also provided data on loan performance, including bad debt rates, arrear details, and outstanding balances. The actual return available to investors has also been revealed.

If management can continue to prove themselves as great operators and managers of risk you have to imagine they will do well.

How do Australian banks compare with P2P lenders?

The country’s banks enjoy a distinct advantage over P2P lenders. Money placed with banks has a government-backed guarantee on deposits up to $250,000. Individuals who put their savings into P2P firms do not get this benefit but then again the returns are vastly different and perhaps should be compared more closely with owning the stock of a bank where returns are higher and so is the risk.

A well-researched investment made in a P2P firm can provide individuals with far greater returns than what is possible through a term deposit with a bank. Borrowers, too, can benefit by taking a loan from a P2P lender rather than from a bank.

Australian banks are the most profitable in the developed world, with combined profits of a massive 2.9% of the country’s GDP. The corresponding ratio for the U.K. is 0.9% and in the U.S. it is 1.2%. The profitability of Australian banks is largely due to higher lending costs and low rates paid on deposits.

P2P lenders offer Australians a much-needed alternative to banks. Of course, it is essential that a little extra caution is exercised before investing in these newly established firms but if ASIC continues to do its job and some of these companies win our trust partly with through their transparency – you have to think we all have a brighter future.

Investors spread money across loans to reduce risk

How Peer-to-Peer Lending Works for Investors in Australia

Peer-to-peer lending has the potential to bring about massive changes in the Australian financial services industry. These companies, which also go by the name of P2P lenders or marketplace lenders, have been operational in the country for the last four years but have only now started making a substantial impact.

P2P Investor InformationThey have rapidly increased their business volumes by routing personal loans to individual borrowers at rates that are generally less than what banks offer. These loans are financed by investors who earn a rate of interest that is more than double what they would get on a bank deposit for a similar period of time.

P2P lenders are able to achieve this feat by shunning the bricks and mortar model of traditional banks. They have very few employees and extremely low overheads. Their business operates on the basis of their websites, which allow investors to place money with them and potential borrowers to access these funds.

In addition to making funds available at low rates to borrowers looking for personal loans, P2P lenders provide an opportunity to retail investors to earn high returns on their savings.

What are the investment options for retail investors?

Most “mum and dad” investors would not like to risk all their money in the stock market. They would prefer to put part of their savings into something secure like a bank deposit. Unfortunately, this form of investment pays abysmally low rates of interest.

The four major banks, ANZ, Commonwealth Bank of Australia, National Australia Bank, and Westpac Banking Corporation offer deposit rates that are in the region of 3% per year.

Marketplace lenders offer an excellent option to retail investors who are looking for a higher rate of return. But the question that any investor would ask before lending money using the services of a P2P web portal is, “Are my funds safe?”

In order to answer this question, it is important to first understand how a P2P lender functions.

Making a loan through a P2P lender

The basic investment principle that says risk increases in direct proportion to the return available, holds true in the case of amounts lent through marketplace lenders. The higher returns that can be obtained through P2P lenders carry a greater degree of risk than a bank deposit and it is a real possibility that an investor could lose a part or even the entire amount invested.

The Australian Securities & Investment Commission has clarified that the government guarantee on term deposits does not apply to funds invested through marketplace lenders.

Despite the non-availability of government protection, funds placed through P2P lenders are quite safe. There are two prominent companies in the country that investors can consider investing through. The first, SocietyOne, a home-grown marketplace lender, has been in existence since 2012. The second firm, RateSetter, was launched in the UK in 2010 and has been in Australia since November 2014.

RateSetter accepts money from retail investors. Currently, SocietyOne allows only “wholesale investors” to use its platform and a minimum investment of $25,000 is required. But the company is in the process of allowing “mum and dad” investors to use its platform.

Investors who have placed their money using these platforms have obtained returns in the region of 8 to 10% or even more. Their money has been totally secure as P2P lenders have well-developed credit appraisal systems in place. Potential borrowers are subjected to a process that determines their repayment ability before they are allowed to take a loan using the P2P lender’s website.

Another practice that is followed by marketplace lenders is that they allow investors to spread out their investment among multiple borrowers. If a borrower is taking a loan of $10,000 it may be provided by 10, 20 or even more lenders. This helps in minimising risks and allows investors to earn a high return secure in the knowledge that even if a borrower defaults they stand to lose only a small amount.

Investors should take out a little time to understand how these two major companies operate and the practices that they follow to ensure that the money placed by them is safe.

SocietyOne

Although the P2P lending industry had a slow start four years ago, the situation has now changed. A number of new entrants have come into the market and many more are waiting in the wings.

But SocietyOne is the pioneer in this field and the only company that has a record built up over the years. Currently, investors lending money through this firm’s portal can earn gross interest rates ranging from 7.6% for borrowers categorised as AA, to 13.55% for D grade borrowers (rates updated 15 August 2016).

The actual returns that investors would receive would be slightly less as they would be reduced by SocietyOne’s service fees, currently 1.25% of the principal amount, and any loan impairments for the selected credit grade. It is quite safe to assume that the return will be several times that of a bank deposit.

RateSetter

‘Mum and dad” investors are allowed to invest through this P2P lender. Currently, an investment for a one-month period earns an annualised return of 2.9%, after fees. The returns for one year, three years and five years are 4.8%, 8.8% and 9.9% respectively (rates updated 15 August 2016).

RateSetter maintains a provision fund that is used to protect investors from delayed payments and defaults from borrowers. The company publicises its figures and currently it has over $24 million in loans outstanding against which it has built up $1.3 million in its provision fund (As of early 2016). The provision amount is twice the sum required to make up for expected defaults.

Investors can start with lending sums as low as $10 for a period of one month. Of course, this is only RateSetter’s way of indicating that it is open to accepting small investments. Many investors start with small sums and once they gain confidence, they gradually build up their portfolio of loans.

An opportunity to earn higher returns

P2P lenders give retail investors the means to earn the margins that banks have traditionally kept to pay for their high costs and overheads. Using technology and well-developed processes, P2P lenders have taken the place of banks and passed on the resultant savings to borrowers and investors.

Additionally, they ensure that money is loaned only to borrowers who meet certain basic eligibility criteria.

Many “mum and dad” investors have already taken advantage of the investment opportunity that P2P lenders have presented and earned returns that are much greater than what they would have obtained from a bank deposit.

While it is not advisable to place a significant proportion savings with P2P lenders, it is definitely worth considering this option to be a part of a retail investment portfolio. Also see our disclaimer.