Update in Spring 2020: As a result of the ongoing Covid-19 crisis, all peer-to-peer lenders are having liquidity problems – in other words investors are not able to immediately get their money out even from so-called ‘Instant Access’ or similarly branded accounts. Ratesetter is no different. Nobody has lost any money with Ratesetter yet as far as I’m aware, but only a small amount of money is being released every week through its secondary market. Cautious borrowers should note the extra risks; even adventurous (/rich!) types should only invest money they can afford to have locked up for years in case it takes a long time for things to return to normal. In a worst case Covid-19 scenario you could lose some of the money invested. Please do your own research, and make your own decisions carefully.
I won’t cause any readers to fall to their knees screaming “No! How can it be? Why didn’t somebody tell me!” if I say it’s been hard to get a decent interest rate on cash for the past few years.
Even the Bank of England’s rate rises haven’t done much. High Street banks always drag their feet in passing on rate rises.
But in this article I’ll explain how you can effectively get a 14% return on a chunk of your cash by taking advantage of a bonus offer from RateSetter, the peer-to-peer lender.
True, this very attractive potential return does not come without some risk.
In practice, no Ratesetter investor has yet lost a penny. Every lender has received the rate they expected.
Nevertheless, peer-to-peer does not have the same protections as traditional cash deposits, so you should think about it differently to cash in the bank. More on that below.
If you can accept the risk and have the spare cash to hand, I believe this is a pretty safe – though not guaranteed – way to make a good return.
It also exemplifies how being nimble with your money can enable you to achieve higher returns – even in today’s low rate world.
Not a few Monevator readers have taken advantage of this win-win RateSetter offer over the past couple of years!
About RateSetter
RateSetter is one of the new breed of peer-to-peer lenders aiming to cut out the banks by acting as a matchmaker between ordinary savers and borrowers like you and me.
Rates change all the time, but as I write you can get up to 5.4% as a lender with RateSetter by putting your cash into its five-year market.
Since March 2018 you’ve also been able to open a RateSetter ISA, which means you get your income tax-free.
Meanwhile borrowers can get a loan charging less than 4%. RateSetter claims that rate is competitive with the mainstream banks, and says banks are its competition (rather than it simply getting all the bank rejects).
RateSetter charges no lending fees, which is great news for savers like us. Borrowers do pay a fee.
Over £2.5 billion has now been lent through the RateSetter platform. This is no longer a tiddly operation.
And importantly, of the 66,942 investors who’ve lent money with RateSetter not one has yet lost a penny of their investment.
In 2010 RateSetter set-up a ‘Provision Fund’, which is funded by charging all borrowers a risk-adjusted fee.
Money from the Provision Fund is used to repay lenders whose borrowers miss a payment, for as long as there’s money in the fund to do so.
It’s a different model to the initial approach of rivals like Zopa. Back then you were encouraged to spread your loans widely and accept a few would go bad, reducing your return.
The RateSetter approach is different.
But as sensible people of the world, we should understand there’s no magic here.
Downside protection
Some loans will still go bad. And those bad loans will still reduce the returns enjoyed by lenders in aggregate – because the Provision Fund fee levied against borrowers as part of the cost of their loan could otherwise have gone to lenders through a higher interest rate.
However what the Provision Fund does is share those losses between all lenders, reducing everyone’s return a tad.
This makes your returns predictable. Your outcome should be dependent on the interest you receive – rather than being distorted by the poor luck of being personally hit by an unusually high number of bad debts.
Note that the Provision Fund does not provide complete protection against a situation where all the loans made at RateSetter default. Far from it!
Rather the Provision Fund aims to cover the bad debts predicted by RateSetter’s models, with a margin of safety on top.
At the time of writing, Ratesetter says:
In the event that credit losses were to increase significantly, the following things would happen:
The Provision Fund would reduce in value as it reimburses investors for missed payments.
The Provision Fund is large enough to cover credit losses up to 116% of expected losses. If credit losses rose above this level, the Provision Fund would be depleted and investors would earn less interest than they expected, but their capital would be unaffected.
If credit losses rose even further and exceeded 231% of expected loses, investors would start to lose capital, which means that they would get back less money than they put in.
In this instance, it may take longer than expected for investors to receive their money back and access to funds may be restricted.
What would happen if losses did exceed the RateSetter projections?
First the Provision Fund would be used up, and ultimately exhausted.
After that interest payments could be redirected to repaying capital. You’d lose on interest payments, but it could cover lenders’ losses on capital unless the default rate got too high.
Finally, in a doomsday scenario with very high default rates, capital could be eroded. I’d expect other investments like equities and corporate bonds would also be taking a pummeling. But cash in the bank would not.
At the end of the day, I believe for most people the Provision Fund approach is preferable to the lottery of individual loans defaulting. But don’t mistake it for a panacea or a guarantee.
You could conceivably lose money if defaults are much worse than expected. More on that below.
How to bag that 14% return from RateSetter
At last, the good bit!
RateSetter is currently offering a £100 bonus to new customers who invest at least £1,000 in any of its markets and keep it there for a year.
This £1,000 minimum investment can be made up of new subscriptions and/or transfers from other ISA providers.1
The £100 bonus is paid once that year is up. It will be deposited into your RateSetter account, after which you can choose to do with it (and the rest of your money) as you please.
Clicking on any of the RateSetter links in this article will take you directly to the sign-up page for the £100 bonus.
For full disclosure, RateSetter will also pay me a £50 bonus if anyone does sign-up via my links, which would obviously be very welcome! My bonus doesn’t affect your returns. It’s paid by RateSetter.
As for your £1,000 investment, you can put it into any RateSetter market, which range from a rolling one-month option to a five-year lock-up. But you must keep it within RateSetter for a year to get your £100 bonus.
To keep things simple, let’s assume you invest your £1,000 in the one-year market, which matches the period required to qualify for the bonus.
The one-year market is paying 4.7% as I type.
So after one year you’d have your 4.7% interest on your £1,000 and you’d also receive your bonus, which works out as a return of 14.7% on your £1,000.
Very nice!
I’ve ignored taxes here because everyone’s tax situation is different.
The good news on taxes is that:
- You can now open a RateSetter ISA and collect the bonus. You can fund this with a transfer from another ISA provider. In an ISA the income you earn is tax-free.
- Most people even outside of an ISA will pay no tax on cash interest, thanks to the new-ish Personal Savings Allowance that covers the first £1,000 of interest earned by basic rate taxpayers, and £500 for higher-rate payers.
Is this bonus too good to be true?
A great question.
Clearly it’s not sustainable for RateSetter to lend your money out at, say, 4%, while paying you an effective rate of nearly 15%.
(The cost is even higher to RateSetter if it pays me a bonus, too.)
RateSetter must be hoping this is the start of a multi-year relationship with its new sign-ups, after they become comfortable with its platform.
Once you get over the initial hurdle, peer-to-peer is straightforward. I’ve used these platforms for ten years now.
RateSetter will hope many customers deposit more than £1,000 and ultimately prove profitable in the long-term.
Like all peer-to-peer lenders, RateSetter will be aiming to scale as quickly as possible. Greater size will improve its margins and enable it to continue to meet demand in both the savings and loans market. Scale is a critical factor in virtually all money-handling businesses.
Finally, I expect the cost of this offer is allocated internally to its marketing department.
If 5,000 people sign-up for the bonus that’s clearly a lot of money – but it wouldn’t buy very much TV airtime. At least this way RateSetter can precisely calculate the return on its investment.
I do think it’s a smart question to ask, though, and it neatly brings us back to risk.
A final word on the risks
I have already stated that peer-to-peer lending is not a straight swap for a cash savings account.
The risks are higher.
Firstly and crucially, there’s no Financial Services Compensation Scheme coverage for peer-to-peer lenders. If you lose money, the authorities will not bail you out like they would for up to £85,000 with a High Street bank savings account.
That’s important because even though no savers have yet lost a penny with RateSetter, that’s not a guarantee they will not do so in the future.
The economic situation could change markedly, say, or RateSetter could get its sums wrong on bad debt.
In the most likely (in my opinion) worst-case scenario, the Provision Fund would not be able to cover all the bad debts. This would mean some loss of interest.
- According to RateSetter, as of August 2018 the loss rate experienced to date is 2.29%.
- It currently projects this to rise to 3.33%. (Loans take a while to go bad.)
- If credit losses rose to 127% of expected losses, RateSetter‘s model indicates the Provision Fund would still cover interest.
- In what RateSetter terms a severe recession, you’d get no interest but it believes you’d get your initial money back.
- If we saw 400% expected losses, investors might lose 5.6% of their capital.
This illustration is summarized in the following chart:
Provision Fund figures correct as of 1st August 2018. (Click to enlarge)
Source: RateSetter
As for the worst worst-case scenario, like with any business it is possible to imagine catastrophic situations where you’d lose much more.
But to my mind these would probably require fraud or massive incompetence within the company, and/or a far deeper recession than anything we saw in 2008 and 2009. (Probably both at once – as Warren Buffett says you only see who has been swimming naked when the tide goes out.)
Obviously I don’t think that’s at all likely, otherwise I wouldn’t have put any money into RateSetter.
But a hint of what might have gone wrong came in 2017, when the company intervened to restructure several businesses and cover repayments from one via its own funds. This prevented its bad loans from being defaulted to the Provision Fund. This decision to intervene reportedly2 delayed authorization from the FCA. It has subsequently been granted.
RateSetter says: “This intervention was an exception and will not happen again.”
As I understand it, RateSetter has since withdrawn from the wholesale funding operations that produced this situation. (Wholesale funding is when a company lends money to third parties, who then lend those funds on themselves.)
You invests your own money and takes your choice.
Personally, I am happy with the risk/reward here. Not everyone feels the same. My co-blogger, for instance, doesn’t use any peer-to-peer platforms.
As a halfway house to reduce risk one could perhaps only invest in RateSetter’s monthly market, in the hope this would give you more chance of getting money out relatively quickly if say the economy was coming off the rails. The price is a lower interest rate, of course.
I think it’s worth stressing again that nobody has lost money so far with RateSetter. And even if the economy turns very far south, you probably won’t lose more than a small percentage unless something very bad or criminal happens.
That would be a much worse situation than with cash, but not a catastrophe.
However we all know by now that bad things can happen, and every investment can fail you. Do not invest money you cannot afford to lose.
RateSetter and your portfolio
Personally I have always taken a pick-and-mix approach to spread the risk with these sorts of alternative opportunities.
For instance, I have used both RateSetter and Zopa, I’ve invested a little in mini-bonds and retail bonds, I have money with NS&I, and I have taken advantage of high interest rates and cashback offers with accounts like Santander 1-2-3 to boost my returns.
When putting money into the riskier alternative options, I only invest a low single-digit percentage of my net worth with any particular platform. Like this I aim to mitigate the risks of being hit by some sort of systemic or company failure.
I’m not going to labour the point on risk further. Most peer-to-peer articles barely mention it, and I’ve devoted half this piece to it. Consider yourself warned, and read the company’s extensive material if you want to know more.
I think peer-to-peer and other cash alternatives are interesting additions to our arsenal as private investors. But they’re not slam dunk safe bets. I size my exposure accordingly.
Get your £100 while it lasts
So there you have it – a hopefully even-handed assessment of the risk and reward potential of this £100 bonus offer from RateSetter.
From here you’ll have to make your own mind up.
I do hope some of you found this article interesting and enjoy those bonus-boosted returns.
- Note: Terms and conditions apply with transfers, so check the small print. The money must be transferred over within a certain time period, which may be down to the ISA provider you’re transferring from. Just setting up a new RateSetter ISA with a fresh £1,000 should be straightforward. [↩]
- See this article at Reuters: https://uk.reuters.com/article/uk-interview-ratesetter/ratesetter-recovering-after-asteroid-strike-bad-loan-discovery-idUKKCN1BN1PF [↩]
Comments on this entry are closed.
If they are lending out at 7.9% and the default rate is 1.8%, that leaves 6.1% on the table for me.
My last investment trust purchase was on a 5.8% yield, but this should also provide some capital & dividend appreciation over the years. Plus lower tax rates. I am happier with the dividends.
I’ve never looked into Peer-to-Peer lending before, other than a quick scan though various articles about it.
As with anything that look’s this good a bit of research is needed to completely satisfy myself, I like to think I away’s try to stay on the right side of caution and hopefully it will look to be worth investing at least £1,000 some time this week.
@Luke — If you do decide it’s for you, please do consider coming back to this article and applying through one of the RateSetter links here. It’s worth a pretty good slap up meal for two to me. 🙂
@Jeff — I’m 85% in equities. These things aren’t either/or for me, diversification is the name of the game. Each to their own though. 🙂
@TI, Interesting article, and one that’s got me too considering investigation P2P lending.
…though I hope you wouldn’t frivolously spend your referral bonus on a meal. Surely you should invest it today, to reap many more meals in the future. 😉
Are you sure about the £100?
I see that if I refer someone to RS they get £50 and I get £50.
You have £100/£50.
Well, for a £100 bonus on £1k, I’ll give it a punt for a year. Thanks for the article. I have signed up through your link – hope you enjoy your meal. 🙂
I was curious to see that the 1 year match rate now being advertised is 3.5%, but then on closer inspection it seems there is about £2.7k of funds being offered between 3.5 and 3.9%. Reminds me very much of selling virtual items on markets in video games – you can choose the lowest rate going to get an instant sale, or you can play the longer game and hope the market comes back up. I guess I’ll need to keep checking on the market rate for a little while till my funds find a borrower.
I was waiting until the £1k interest allowance came in before entering P2P, as I didn’t want gross tax and having to fill in a return. I will enter the market soon, and your offer is tempting.
you can get 10% off your meal if you have a takeaway!
I have been using P2P since 2009 and since then have achieved a return of 5.81% (after fees and bad debts). I invest in Zopa, Rate Setter and Funding Circle – circa £20k. They are all slightly different in terms of how you control the level and selection of investment but over time they have become more homogenous. Best advice is still to have many micro loans (e.g. £10) with Zopa and Funding Circle rather than very large loans with Rate Setter. With the new IF ISA, money could flood in and therefore reduce rates.
@Jonny — Well yes, you know me too well… 😉
@Palanglot — Yes, it’s £100 to you. If you follow the link you’ll see that in the sign-up page. 🙂
@Moongrazer — Yes, the rate varies over time. When I started writing this article it was 4.3% in the one-year. One could always use the monthly market (which is my favourite) and look to switch later (or never) if the one-year rate gets unattractive; as I say you can even use the monthly market for the whole of the qualifying year to get the £100. Speed of lending out your money can be annoying if the queue gets very long. Thanks for using the link!
@John B — Wise. On a related note, I am having to detail a long list of capital gains and losses this year to HMRC because of a forced takeover of one of my legacy ex-ISA holdings, and I really do wish I could give the job to the person who suggested here recently that the £5K dividend allowance meant people should no longer use stocks and shares ISAs (for absolutely zero gain in not doing so, incidentally) to ferret out all the data required over many years of required etc. That would get the message home. ISAs are worth it just to avoid paperwork, let alone saving tax.
@oldie — Like your style.
@Loki — That 5.81% citation must have some heavyweight record keeping behind it. Impressive! As I say in the piece I use Zopa, too, and agree with you about diversifying. Haven’t tried Funding Circle yet, may have a poke about.
Two things to avoid for CGT admin is funds that purchase more units with your dividends, or having a direct debit to purchase a few units a month. I’m finally going to clear one of those from M&G in the next tax year, and have spent forever trying to work out how to keep under CGT allowances when selling tranche after tranche. Now 3 units were purchased for £40 in Jan 2009…
@The Investor – Have you or anyone here had a look at Saving Stream? They supposedly offer 12% guaranteed interest, which seems too good to be true..?
@ Bruno – I tried with them for a while because it sounded good, but your money can wait [so not earning] for periods when there are no loans, as there are generals few available. Then early repayments can mean you have an amount dumped back in your account with no warning. Their communication when you try to get explanations of how things work – the site is very minimalist with even basic info – is barely existent too. This means the real rate is lower than advertised if you take into consideration the time your money’s not working but you’re not able to invest elsewhere.
More worrying is that they recently changed the way the protections operate, allegedly to be better regulated, so that if any loan goes bust the parent company aren’t directly backing it. I think this means you have to hope the provision fund is still adequate to cover it, but your money is locked up for the duration of the investigation. [months? …..it’s not well explained]
Lately they’ve had a problem with bot-buying, where if there’s a lot of demand for lending, you can’t physically operate the keypad fast enough to get the deal before it vanishes on the screen. So they put another step in the buying process called a captcha, to try & get around this, but it still seems hard for a normal person.
@TI – OK, I figure I owe you at least £50 so its done but note if anything goes wrong and I lose capital I will hunt you down.
Neil Woodford recently became a major RateSetter backer. Could be worth a tentative punt come the new tax year, when the IF ISA comes in.
Loki makes an interesting point regarding popularity of the product reducing rates. Could money flooding in to P2P lead to lending queues as matching to suitable borrowers becomes an issue. Over supply of cash?
Whoa …….& hold to think a bit – look at what the ECB have just done with more QE & lower bank rates as well as cheaper loans directly to banks. If I understand how it worked last time [yes, only if the same happens now] – the stockmarkets/share prices were artificially inflated for the next 2-3 years.
I even had my SIPP savings in a managed (albeit well/Woodford-style) fund & it increased by 50% in total over that period – as well as holding up impressively during this year’s volatility.
Hmm, my P2P experiments might have to take a back seat until we see how this plays out…..
@The Rhino — Cheers! Also, I know you’re only kidding but to be clear everyone must and should make their own mind up and take full responsibility for any investment.
As always: I’m just a bloke on the Internet and certainly nobody’s personal financial advisor. 🙂
I don’t really get P2P
Beyond the small level of buffer offered by the provision fund (11.5% losses covered and then all the losses fall on you?) you seem to taking an unlimited risk for a limited upside of 4% over one year?
It very much reminds me of split capital investment trusts or precipice bonds
http://www.economist.com/node/2173615
From the Economist in 2003:
“NICE money it looked, back in 2000. Returns on bank and building-society deposits had slumped, but solid-sounding “bonds” and “plans” offered up to five years of income at 10% or more. Many retired people were tempted; in all, the Financial Services Authority (FSA) reckons that 250,000 buyers put £5 billion into such schemes. Few will see much back. [….] Hence the name “precipice bonds”: your capital can fall off a cliff.”
@Neverland — It’s risk and reward. An 11.5% default rate is more than twice that seen in the credit crisis in March 2009, according to RateSetter’s figures. I think most people would agree that period was a fairly decent test of the credit checks and so forth the company has in place.
Could worse happen in the future? Of course. That’s the risk.
Personally I think that in the absence of fraud or a truly dire recession, the chances of true capital losses are very low. (Lower-than-expected interest payments are much more likely if there’s trouble). But of course I could be wrong.
Hence it’s up to everyone to make their own mind up. 🙂
Finally, with the bonus offer here it’s well over 10% (about 13.5% as I write) over a relatively short one-year time horizon (which reduces risk). That’s the whole point of this article. Significantly more upside than normal with P2P.
Of course your point is perfectly valid if applied to the normal P2P market, sans that bonus kicker.
Not that valid, is it? It conflates credit risk (well understood and to some extent possible to limit) with what you’d have to call market volatility risk or something (entirely unpredictable).
John B March 10, 2016 at 10:12 am
I was waiting until the £1k interest allowance came in before entering P2P…
Presumably if one signed up now, there wouldn’t be any interest payment received until the next financial year anyway right?
@R Lee — The risk is not “unlimited” either, but I’m wearing my diplomatic hat today. 🙂
@arty True, until one of your borrowers repays the loan early. Still, that’s preferable to waiting a month only to find the £100 offer withdrawn.
Like a couple of other commenters, I was waiting for the tax-free savings interest allowance (only £500 for me) to come into play in April and then I was thinking about putting a few thousand into Zopa (I’ve had about £1k with them for years, more as an experiment than anything else). So I guess I’ll probably take advantage of this offer instead; you’re more than welcome to £50 in return for all the value I’ve had from this site!
Does anyone know how the £100 bonus is treated for tax purposes? Is it tax-free (like, as I understand it, the bonus some banks will pay you to switch to their current account) or does it count as interest and therefore count towards your £500/£1000 allowance and incur tax at your marginal rate if you’re beyond that point?
Also, what’s the tax position regarding the £50 referral bonus? I found this hard to work out just from googling.
Whilst I generally approve of diversification, I’m not sure how much benefit p2p will give a portfolio at an asset allocation of 1-2%. To exact meaningful benefit from diversification I set a limit of around 4% as a minimum asset allocation. Anything less is a lot of time and cost with only a minor impact on returns and volatility, with an increase in risk.
As a hobby, support for small businesses or as an act of benevolence such as micro-lending in developing countries, p2p certainly has a place in the world, but not so much as a portfolio diversifier unless you are prepared to up your stake.
@Fremantle — Well I guess I partly think of all these alternatives as partly a ‘hobby’ pursuit, for want of a better word. But obviously not entirely! 🙂
That said, I don’t see why adding even just 1% doesn’t add any diversification. I think it adds a very small amount, in real world terms, although as you suggest it could well be not worth the effort from a personal hassle/time factor.
Also, one might only have say 1-3% in a single P2P platform, but have 4-10% spread in total across multiple platforms.
I do think the particular risks of P2P versus say bank deposits (novel proposition, no FSCS protection, greater risk of individual company failure or something dubious going on) for me limits how much I’m prepared to put into individual services, as well as in the sector as a whole. That said my own percentage has been creeping up over time as the sector has matured.
Everyone will need to decide what they’re comfortable with for themselves, of course. 🙂
I think people are getting a bit too worked up about asset allocation.
Time wasting is maybe a bigger issue – and it takes time to become informed about P2P lending platforms.
I have around 16% of my net assets in P2P lending.
This might be a bit high for some – but I have 41% of my net assets in the value of my home.
Should I try reducing that to less than 33% to reduce risk?
Haven’t found a bargepole long enough to consider p2p before, but I can’t argue with this risk/reward on £1K … and if it should ease the ‘monetization’ gripe, it’s even sweeter 🙂
Thanks for all the great writing over the years.
This P2P business is somewhat unsettling?
– It is relatively new, so no long term information/data/guidance.
– Lock-in periods for any sort of cash are not ideal, if the investor hopes to use cash to leap on opportunities in other asset classes as and when they arise.
– I.E. Cannot raise cash instantly at the click of a mouse?
The Investment Trust ‘P2P Global Investments’ has been around for a couple of years now, and maybe not generally realised, was ISA-able from day one! The yield today is 6.35% @ 930. We held for a while but then exited uncomfortably feeling we did not really understand the business.
This particular IT is perhaps not pure P2P, by including SMEs? But in it’s favour can be sold any point in time at the click of a mouse!
Think other Investment Co’s have also started ITs in the P2P field.
As investors we are going to have to get to grips with this Asset Class as a new and lasting option. The article and subsequent comments were therefore most helpful and informative.
Many Thanks
To answer my own question regarding tax status of sign-up bonus and refer-a-friend, I just used HMRC’s web chat feature to ask about these and was informed that neither were taxable.
That has to be the fastest and easiest method of contacting HMRC that I ever encountered…
@Charlie — Interesting. I’m sure I included have included Zopa refer a friend income as net income from Zopa in the past. Darn. Did you copy out their exact response? 🙂
If one were to open a ratesetter acc, deposit 1000 then open another ratesetter acc with a different email address to pocket the 50 referal fee oneself, and so on and so on – the return tends toward 19% as you open more and more accounts assuming ~4% in the 1 year market.
@ magneto, p2p isn’t cash, but at that rate of return it represents an opportunity in another asset class?
@TI, yes I saved transcript…
Me: I have received a £50 “refer-a-friend” payment from a company. Is this taxable and if so how do I declare this on my self-assessment form?
HMRC: The payment is not taxable and does not need to be declared.
Worth checking yourself, afer all, I’m just a bloke on the Internet and certainly nobody’s tax advisor. 🙂
@The Rhino: Ratesetter T&C prohibit multiple refer-a-friend sign-ups via different email addresses – I quote:
“1. […] The Referred Investor cannot be an existing RateSetter customer and you cannot refer yourself (for example, by using another e-mail address or false details).”
@charlie
I did use other real adults to achieve the desired effect rather than myself and multiple emails – I think thats fine. The money has been lent anyway, so I hope its fine..
thanks for finding out about the tax position – thats better than I expected
FWIW, second part of transcript from HMRC query regarding sign-up bonus is as follows:
Me: They also offered me a £100 sign-up bonus (to be paid in a year). Is that taxable, please?
HMRC: Is this a company you are working for?
Me: No
HMRC: no it wouldnt be taxable unless it became a regular payment
I wonder if signing up now, the sum would be transferable to the IF ISA come April?
Touche. 😉 Thanks for that pleasant information.
@charlie Thanks!
As an alternative, you could switch your banking to Clydesdale and bag a £150 signing on bonus, plus earn 2% interest p/a on account balances up to a limit. Suppose you pay in £1k (recycling this a month later to meet the terms of the bonus) and that the £150 is paid after 3 months. You’ll have just made a 15.5% return (equivalent to more than 62% annually) and without risk, assuming you qualify for the FSCS guarantee.
The thought I’d like to share is simply that you can do better than the 14% ‘return’ being offered by RateSetter and for less risk, which seems slightly misleading to me when described in this way. Though I do accept this could make sense if you’re trying to maximise the returns on debt instruments in a small portfolio (as the bonus will skew them).
The interesting question would seem to be how peer-to-peer lending should fit into an investment portfolio. If the diversification benefit of adding it allows you to reduce risk without reducing reward then theoretically the answer could be yes. But given the size of the peer-to-peer market at the moment I suspect this would likely fall into the ‘tinkering at the edges’ category. So as a time-poor investor that likes to keep things simple, I’ll personally be giving it a miss for now.
Having said the above, I do agree that @The Investor deserves a meal out or two on us readers – perhaps we instead switch to Clydesdale and send him £50?!
Happy weekend everyone.
PS – I’m not endorsing Clydesdale and only mention them as they seem to be top of the ‘switching incentives’ tables at the moment.
@Rob — Nice idea, thanks. 🙂 I 100% accept that P2P isn’t for everyone but the elephant in the room that people saying “do this *instead*” are ducking is all these wheezes (including the RateSetter one) are hugely capital constrained.
£1k here, £200 a month there. Even Santander’s relatively glorious 3% is limited to £20k, as you know.
If I had just £1k (or £10k for that matter) the last thing I’d do is put it all in P2P. But for the many readers like me holding a lot of cash (partly as a result of this low yield world for traditional fixed income) who are determined to sweat our capital, it’s more a case of this AND this AND this… 🙂
Thanks for the article, a quick question on switching accounts, have any of you readers gone through the process just to reap those sign up bonuses? TI, thanks for the recommendation, if I like what I read on their site, you’ll be receiving that referral bonus from me.
@Grand… I had to switch to First Direct current account when I got a mortgage with them…so I did it and it was painless, and I got I think 125 at the time. So I went and opened a Barclay’s current account and have swapped it every so often since just to cash in 😉
If you’re going to do it check money supermarket sometimes they do even better enhanced rates through there…or get a friend with a Nationwide account to recommend you…then you BOTH get £100 !
thank’s.. i’ve a few accounts where i am not getting anything on them.. might as well cash in.
I signed up over the weekend but got told I had to wait for some normal account checks to complete. They’ve just e-mailed me asking for a colour copy of my passport or driving licence and two recent bills. Have I been singled out for special treatment here? This seems insane.
@Steve — I didn’t have to do that when I joined a couple of years ago. I’ve had to do it a couple of times with other banks / financial companies though. It does seem a bit of a lottery. Perhaps literally sometimes. (E.g. Random checks). As you probably know everything has been tightened up following the laws brought in to watch the flows of money (to curb funding to terrorists etc).
@Steve,
Wasn’t the case with me this weekend…
Thank you for the helpful post, I signed up using your referral link, mainly because Monevator has been a huge help with sorting out my financial life.
@Steve – I did not have any checks when signing up. The sign up, deposit and matching took less than 5 minutes to process.
its the dicking around with direct debits that is the nail in the coffin for me with current account tarting. i don’t have enough of them and can’t stand having them in different places when it comes to doing the monthly accounts.
the wheeze i was most happy with was getting 3+% on childrens cash accounts, with a limit of 50k per account. Even when you pay your own tax after the 1st £200 you are still as good or better than santander 123, i.e. top of the tables but with more than double the upper limit and you can multiply that again by how many kids you have. so a lot less capitally constrained than other techniques
admittedly you do have to have kids though which you could argue is even worse than moving a few direct debits about.
I haven’t got to the bottom of how the new 1k allowance interacts with paying tax on interest in your kids accounts – if anyone has then I am all ears. i would assume you get your 1k then the 200 then you start paying tax at your marginal rate, but as i’m well aware, to assume often makes an ass of u and me.
Cheers to anybody who signed up via the link. Obviously it’s (hopefully!) going to be a win-win for both of us, but the sentiments are much appreciated. 🙂
Done. Bit surprised that the yearly rate was 3.2% when I logged in, and 3.8% when I refreshed 10 minutes later!
Hi Monevator – thanks for the posting – I’ve just signed up. Hopefully you’ll get your £50, well deserved for all the useful emails I get from you!
@Steve
I seem to get asked for checks every time! I think I’m just not included on some vital database, possibly because I am self-employed and spent a few years abroad. As a result, I always have to send in supporting documentation (ID, utility bills etc.) of the sort that is becoming increasingly hard to find in our paper-free world.
I have signed up with £1000 and been matched at annual rate of 4.2%, using your link so hopefully you will benefit too.
Novice questions:
1- If the Borrower repays prematurely how does that affect a) your return, full amount for shorter period and b) if it cannot be matched again, how does that affect you earning £100 bonus if not placed for full 12 months?
2-Can I go through process again with another £1000 and get a second £100 bonus and so on?
Thanks for introducing me to a new way of investing!
You should also get 50 quid from me! Enjoy your meal because you totally deserve it. Many thanks for the great stuff you’ve been sharing with us!
Btw, no ID checks, which I often get asked to do. Got 3.9% for 1 year but still waiting to get to the front of the queue which is at 3.6%. They tell me that I still have 1 month to qualify for the £100 bonus, so I guess if I am not at the front of the queue by then, I should lower the rate I am asking for in order to get the bonus, right?
@Nuno the rates seem pretty volatile – if you leave it for a bit it will prob get lent
@The Rhino Thanks! You’re right, it got lent at 3.9% in 18 hours!
Nice article! I have been using Zopa, Ratesetter and Funding Circle for a few years now and probably have way too much of my net worth in them – about 25%.
Here’s how I’ve found them:
Now that Zopa and Ratesetter operate in a similar way, Ratesetter seems to always have better rates. I have my money on the five-year loans with automatic reinvestment. It’s a great set it and forget it system. I don’t think I have touched my Ratesetter account since setting it up over three years ago. Unlike with bank accounts, it doesn’t require me to always be moving money around and opening up new accounts to make the most of introductory rates.
Funding Circle is a bit of a different beast and much more hands on. Instead of lending to people you are lending to businesses and instead of your investment being spread out automatically you have to choose each individual business you lend to. The auto-bidding algorithm is really bad, so if you want to be truly diversified it can take a bit of work to spread out your money manually.
But on the plus side, the rates are higher and they have a strong secondary marketplace where you can buy and sell loans. It means that even though most of my money is lent out on 5-year terms, I can always sell out quickly for a small profit or loss. The rates are also higher, since joining a little over three years ago I have averaged 8.9% at FC vs 5.9% at RS.
About a year ago I wrote an article about maximising your rate from Funding Circle that you might be interested in (http://www.arbing.co.uk/higher-return-funding-circle/). Mainly it is about arbitraging the two marketplaces and since they changed the way the auction system works some of it is now redundant, but most of the points are still relevant and useful/interesting.
Hmmm. Bit wierd. My wife signed up following the link in the article and matched £1000 in the annual market. She received an email confirmation of this. This morning she received another email saying that her £50 has been matched in the monthly market. What £50? I wonder whether following the link from here has automatically put her in the £50/£50 refer a friend deal, rather than the £100 one? Anyone else get this that followed Monevator’s link?
Of course I wouldn’t expect you to do third-party support – I don’t believe I asked for any? I was just wondering whether any other of your readers had experienced the same thing.
Unfortunately my wife has not had time to check her account as she has been rather tied up today but I’m sure she will when she gets home, and I’m also sure that, if she finds the £50 registering in her account, she will query it with Ratesetter.
Like I said, just seeing if she is a “one-off” or not.
@Burgmeister
Odd – I’ve had the same experience: a £50 bonus appearing (despite me not referring on to anyone). The £100, as far as I can tell, is due to appear in my account at the end of the year. Will report back in 2017!
Hi @Burgrmeister, @Tim G, Dan at RateSetter here. That sounds odd – would you mind sending your details through to contactus@ratesetter.com so that we can look into it?
Thanks!
Just invested the #1000 though one of the links. My account shows I can still invest #1000 up to may to get the bonus? I need to check with them if my investments counts.
enjoy your meal and thanks for a great blog
Maybe you should change the “14% return” in the title to “around 10%-10.9% return”, as the current lowest OFFER for 1 year lending is 0.9%, and there’s no bid!
It seems there’s a lot of lenders at the moment that have pushed rates down across maturities. The 3 yr bid-offer is 2%/2.2% and the 5 year is 4.6%/4.7%. Less than a week ago I lent in the 5 year market (after clicking through Monevator’s link!) at 6.1%!
After seeing this low rate for lending, I was tempted to apply for a loan (to put against my offset mortgage), figuring that even after Ratesetter takes a cut, I would still be able to borrow for around 1% or so. But no, I was quoted 5.7%!!!
@theta — Ouch! That said, as you say it does move around. I saw 3+% when I last looked, which was either over the weekend or just before. I wonder if that very low rate might be an artifact of the Bank Holiday weekend?
Update — I’ve just checked and you can currently lend at 3.3%. So things clearly a little volatile, but I think premature to suggest more persistently depressed?
Ha, indeed, now it’s 3.4/3.5% for the 1yr. The 3yr and 5yr remain low though at 2/2.1% and 4.6/4.7% respectively. The term structure is especially weird, with an implied 2yr fwd rate starting in 1 yr of about 1% and implied 2yr fwd rate starting in 3 years of more than 8%!!!
It’s getting worse – Current 3yr mid market rate is 2.05% and 5yr is 5.95%. Therefore implied 2yr forward rate starting in 3 years’ time is just over 12%! 😮
There’s clearly excess demand to borrow for >3 years and excess lending supply for 3 yr maturity (more so than 1 or 5 years). For the demand side I can see a reason, if it’s a business that needs to avoid refinancing risk. For the supply side though it’s not justified, as lenders are better off blending 1 and 5 yrs to achieve the same duration and much higher returns.
Overall it’s clear that this inefficiency is a result of poor liquidity, which can be at least partially attributed to the lack of market makers / arbitrageurs. If Ratesetter expanded their “sellout” feature to allow effectively active trading of customers’ positions, they would improve liquidity across maturities and at the same time they would raise their profits from the increased transaction fees. As an example, if they charged 0.1% per side, people would trade in the order book until the 3yr rate sat somewhere in between the 1yr and the 5yr ones. this would bring better rates for lenders in the 3yr market and borrowers in the 1yr and/or 5yr ones (and overall fairer for everyone), some profits for the arbitrageurs and additional profits for Ratesetter from transaction costs.
My return from this so far is looking like about 18.5% with £2,000 of capital at risk for a year. That’s my own £100 bonus, my partner’s £100, my £50 for referring my partner, plus another £50 for the one friend I’ve so far found who also thought it was a good idea to invest. So 300/2,000 and 3.5% interest = £370 or 18.5%
Any additional friends that either of us successfully refer are going to keep adding a further 2.5% to the overall return (50/2000) with no additional risk (to me).
Hope it’s been lucrative for you too Investor – out of interest, how does it compare to all those tiresome Amazon links, or is that a trade secret 😉
Just signed up, enjoy the bonus 🙂
Post Brexit viewpoint ?
@Ivan — Hi. I think peer-to-peer, including Ratesetter, is riskier in the light of Brexit. Personally I’d still go for the £100 for £1,000 for a year minimum investment offer if I hadn’t already, the effective risk-to-reward still looks good to me. But as always I am not prescriptive nor responsible for others’ actions, and readers will need to make up their own minds. 🙂
I’m going to do a follow-up post when I get a chance about P2P, contingency funds, and likely an aside about Brexit.
If you invest £10,000 in the 5-year-market at 5.7% annualised returns but withdraw all the money after 3 years, do you still get 5.7% return for year 1, year 2 and year 3? What keeps people from signing up for the 5 year market but withdraw everything after 1 year?
@The Investor “I’m going to do a follow-up post when I get a chance about P2P, contingency funds, and likely an aside about Brexit.”
I would love to hear your thoughts on P2P post-Brexit. Looking forward to it. 🙂
@Paul I imagine that if you lend for 5 years, but then interest rates go up and you try to get your money out, other investors are unlikely to want to take over your loan since higher interest rates are available.
@Andy Funding Circle secondary market allows you to set a +- 3% discount/premium when selling, which would allow for that. More flexible than a 5 year savings bond, but it would be galling to take the explicit hit on less attractive loads.
The higher-level sites like Ratesetter must rely on selling back to the company, so the hit is less clear.
I punted £1K via your link, and expected just to put it in a 1 year loan, but am a bit surprised at what I find:
5 year Matches last 24 hours: 315
3 year Matches last 24 hours: 204
1 year figure not even given
Rolling Matches last 24 hours: 11568 Borrower offers for £7M, £10M on offer.
So the 1/3/5 year loans aren’t really the business (I understand they are dropping 3 year anyway), it the Rolling Market.
Then the £7M borrower (unsatisfied) offers implies some sophisticated (big?) bidders out there.
So, has anyone looked under the bonnet of Ratesetter, as to where the bulk of the cash is loaned? My guess is that it is primarily going to property developers, and any downturn in the UK property market will hit hard.
Hi Monevator, what I would like to know is this: Not counting the ‘commission’ you have made (or re-invested), how much personal money of yours have you invested? ….this should be interesting.
@tony — Why interesting? I say in the article that I don’t invest more than low single digit percentages of my net worth into any such platforms. You don’t know what a significant sum is for me, and it might be a lot more or less than it is for you. I’ve done my best job of explaining the pros and cons of the platform to you, but it’s up to you to make your mind up. Your slightly troll-ish sounding comment seems to presume some particular high or low sum would be interesting, but it should have nothing to do with your own situation whatsoever.
I presume I’m pointing out what you already know, but have you looked at Kuflink.
Only £500 needs to be invested for 12 months for a £100 sign up plus the 4% interest – so a c.24% return.
Sign a partner up and then it’s £100 each, so for a couple investing £1,000 the return is c.34%. Not life changing but worth a look for those who invest in P2P.
Obviously the same concerns as with all P2P lenders around lack of protection so people need to assess themselves and the risk of bad debts in each case. I used the automated investing which spreads it over 10 loans at the lower interest rate to be more secure.
I have a question that in all honesty is a bit of a silly one. As it is an ISA, do any profits made count as part of your annual contribution? Or is it more along the lines of dividends within an ISA and does not count towards the allowance?
A bit basic but if anyone can clear this up I’d appreciate it.
Great blog. I have found it incredibly useful
Interesting article and useful sections on the risk, limiting investment to small single digits of net worth is not going to hurt anyone but I am puzzled by the economic model.
It seems that I can lend £20,000 for 5 years and get 5.7%, I can borrow on the same terms at 5.9%, not much of a margin. Tesco offer me the same loan at 3%, arbitrage opportunity perhaps ! More seriously they will be attracting less creditworthy clients, than say Tesco bank and operating on a very small margin….
Not that Tesco lending makes much sense , the offered rate is only marginally less than a similar maturity corporate bond from Citigroup, with a market cap of $181 billion they clearly deserve a better rate than me, but less than 30 basis points….. (2.71% ytm over 5 yrs 11months)
On the basis that “bad returns in bad times” come around from time to time I rather suspect that the peer to peer lending model may be severely tested in “bad times” and less well informed investors than Monevator readers may regard it more like a bank account.
@Hari — The rates move all over the place constantly, so I’d be wary about drawing too much in the way of conclusions from two spot quotes. That said, your point is well taken. These platforms are built on the premise that they can forego most of the margin of a bank to the benefit of lenders/borrowers, and still make a profit. And ultimately the jury is still out on that.
Ultimately it’s a matter of personal risk tolerance. People (including me) have had questions from time to time about these platforms over the years, if not outright skepticism, but Zopa and RS have both prevailed, for more or less a decade, and delivered decent returns along the way.
As I say in the piece I think the place to put your money if you’re nervous is the monthly market. You’re often not giving up much of the spread for that access. That said the access isn’t guaranteed, so if one had second thoughts in say a recession you’d want to be trigger happy and get out sooner rather than later.
And yes, I’d keep allocations low and have in the past on a percentage basis. The FCA is worried because it is finding people putting half their life savings into P2P etc. That’s foolish.
@Paul — I’ll have a look, but to be honest I am hyper picker about P2P platforms. I’ve only felt very confident about half a dozen of them, and used fewer. Still, RateSetter and Zopa were young/small once I guess.
@Mr_Curious — It’s only an ISA if you open it in an ISA. You can also have a standard non-ISA RateSetter account. Depends what you want to use this vital tax wrapper for.
Anything earned in any ISA (capital gains, dividends etc) is never taxed, and never counts towards your annual contribution. It’s only fresh money that counts — as you know you can add up to £20K a year.
Thanks for the response @TA.
Just as I had thought but always best to check I guess. Expect another little reward coming your way over the weekend!
Interest I assume is taxed as normal interest income, but what about the £100 bonus?
Also, what is the tax treatment of losses? For example, can losses be used to offset interest gains, or be used to offset capital gains?
@Naeclue — When I’ve had referral bonuses paid it’s been broken out on the end-of-year consolidated tax certificate from RateSetter as separate from interest income, but of course it’s still taxable income. I’m sure it’s the same with the £100 bonus.
As for losses, they can in theory be used to offset other interest gains.
See HMRC guidance here:
https://www.gov.uk/guidance/peer-to-peer-lending
Because of the Provision Fund, you wouldn’t ordinarily see your losses however; any loans that default will be topped up by the Provision Fund. If the latter was exhausted and you did sustain a capital gains loss, then it’s my understanding (and I’m not a tax accountant etc!) that the above guidance would come into affect.
I believe Zopa introduced its SafeGuard fund because at some point losses could not be set off like this, and then a couple of years ago reverted to its old model because HMRC guidance changed. But that’s from memory, so please DYOR if it’s an important / material issue for you.
@Mr_Curious — Cheers, enjoy yours! 😉
@Investor – I agree, I’m only got a small investment in both Ratesetter and Kuflink now given the risk. Kuflink was acceptable in the end mainly on the back of the referral fee as it gave cover for some losses but I’d want to monitor those investments before I put more in. In theory, there is security over the properties and the platform taking an initial loss similar to Ratesetter loss provision, but there’s always a concern. Fine though as a fragment of a rounded portfolio of investments.
I just had about enough of getting lovely 0.35% from Halifax on my savings so this is a timely reminder to act. I click through but I’ve used Ratesetter before and so have an account and I am not sure if I will get a £100 bonus? Is it for new customers only?
@Lola — I think it’s new customers only but not sure how that’s categorized. A partner or similar would be a new person I suppose?
@Naeclue do your own research of course, but it appears that one-off kickbacks are free of all tax (treated as a discount). But long running ones like 1% on a debit card are taxable. See for example https://www.taxadvisermagazine.com/article/savings-income-issues-including-bank-accounts-paying-‘rewards’ but don’t just look at the bullet list at the end: see the paragraph in the middle in parentheses.
@Investor – thanks for flagging the bonus and the incredibly well thought out analysis. Which as always on your site is hugely helpful. Along with some other generous types (John Kay and Mr Money Moustache in particular) who share their thinking on finance and investing I think you’ve saved me material sums of money by avoiding adviser and fund charges. Many many thanks and keep up the brilliant work. ( I’ve signed up via the referral link so cheers again for that)
Referral bonus on the way as a very small thanks for the outstanding quality of the monevator articles, brexit coverage excepted.
Cheers The Great Escape and any other who chose to sign-up via my link. (We can agree to disagree on Brexit. 😉 )
@Investor – “You can also have a standard non-ISA RateSetter account. Depends what you want to use this vital tax wrapper for”
I understand the Ratesetter ISA is of the newer Innovative Finance ISA type which can be held in addition to the others (cash, stocks & shares etc) so you can have one in addition to one of each other type (although the overall year limit remains the same as far as I know).
@Simon — Yes, quite right. Perhaps I should have written “Annual allowance”. Will ponder an edit!
Hi,
Just to let you know, I used your offer and invested in RateSetter for a year. Cheers!
I took advantage of this promotion just under a year ago, following Monevator’s advice and link. I invested £1000 (I’m not rich) for 1 year at market rates (not the high risk ones). I think they were about 4% at the time.
I’ve just received an email to say the matched borrower has repaid their loan early so my capital and interest has been credited to my account earlier than expected. I’ve been repaid £1007.51. I’m still not rich, but that’s an amazing return over just short of a year and I’m still due the promotion bonus on the 1 year anniversary.
As Monevator advised, it’s not as safe as a cash ISA etc, but the return is so much more than 1.5-2% pa ignoring the promotion.
My main concern for the next few years is the likely downturn as people worry about Brexit (even if it doesn’t happen) which could impact the P2P business model.
This is an edit to my previous post.
Apparently my maths is poor: a friend pointed out I’ve earned less than 1% over the year without the promotion, so I should be underwhelmed
Please note that Ratesetter’s statements on their PF are vastly overstated. I.E. You state:
“At the time of writing, Ratesetter says:
Future losses would need to be 1.23 times larger than it predicts before investors’ interest income starts to be at risk.
Future losses would need to be 2.48 times larger than predicted before investors’ initial investment starts to be at risk.”
To be correct, this should say:
Future losses would need to be 0.23 times larger than it predicts before investors’ interest income starts to be at risk.
Future losses would need to be 1.48 times larger than predicted before investors’ initial investment starts to be at risk.
Also note that the PF position has now deteriorated further!
Hi — Well we could debate which wording is correct. 🙂 But anyway RateSetter seems to have changed its own wording on credit risk, too. I have updated the copy above with a direct excerpt from its discussion of the provision fund.
I used the referral link a while back (28/12/18) also – partly to get some experience of how P2P works. SI went for the rolling rate which in theory will mean the money gets lent more quickly. When I put the money in it was 2.3%. Looking at things so far, I’ve learned that it’s quite hard to track how things are going.
I say that because even £1,000 may be lent out as several loans which may be for small amonts (I’ve one which is £41 over 21 months). Borrowers can pay back early of course as well. I can see £4.44 in the “holding account” but “unmatched orders” shows nothing – so I don’t know why that’s not lent.
It’s quite difficult (though perhaps not impossible by visiting several screens and getting CSVs into Excel) to see when my money has and has not been earning interest.
However, looking at the overall picture, my interest earned to date is £5.72. That seems to be about 1.75% annualised if my sums are right. Given that I started at 2.2% and current loans are at 3+%, that seems to suggest money has been off loan for some of the period – unless there’s another explanation I’m missing. Disappointing so far. I’d welcome any comments from those more knowledgeable to help me understand.
Interested to understand as would like to invest a little more. I suppose if we use the 1 year rate then this uncertainty goes away provided the money is initially matched quite quickly – or is it?
@StuartB — Evening. If you pay attention to the rolling market rate you’ll find it moves around a lot. Quite often it’s higher than the one-year rate! (Like right now, in fact, where it’s quoting at 3.1% versus 2.9% for one year). However as you’ve discovered, intending to keep your money in the rolling market for one-year is not the same thing as locking your money away for one year. Just as you expect more liquidity from the rolling market (and will usually get it, I’ve many times liquidated money within 24 hours) so the same thing can and will happen to your investments. So the rate you get will be lower. That’s the price of that liquidity potential.
When you think about it, would actually be rather strange (and even worrying) if the rolling market did pay near the one-year fixed rate; it would suggest something wasn’t quite right I think. But in practice, the actual rate you get is affected by the time your money is out invested, as you’ve found.
Personally I’m happy with the rolling market with my money in RateSetter (I have less cash knocking about these days after buying my flat! :-\ ). If/when I build up large cash sums again, at that point I’d look to lock away a portion of my cash reserve in the one-year market. (I’m talking 1-ish% of my net worth max on any particular P2P platform. Remember this is investing, not cash saving, and money is at risk for those higher returns.)
The good thing is with the referral link deal most of your return is “locked” as the bonus. 🙂
Hi – thanks. Yes makes sense, just not that obvious or predictable of course – just something to bear in mind.