Exciting times! For a limited time only, Ratesetter are offering you (new customers) a £100 bonus when you invest £1,000+ for a year. You can grab this cracking offer by using my special RateSetter Link. Note that this bonus offer is paid for by RateSetter and does not affect your returns at all. For full disclosure, The Humble Penny also gets a small commission if you invest through our link.
The below review contains my opinion only and is written to be balanced and completely objective. I’d also like to point out that I am writing this as an investor in RateSetter myself.
I previously introduced you to how to invest through peer-to-peer lending as an alternative to holding cash, although with more risk and potentially more returns.
With the current returns on cash at historic lows, it is worth considering as sensibly as possible, what other options could be available for a return.
As you’ll learn below, peer-to-peer (P2P) investing does not come without its risk warnings.
However, the asset class is growing in popularity and continues to deliver healthier returns than I am currently getting in a savings account.
RateSetter is a UK company and was founded in 2010 to give people the opportunity to make more money on their money.
It is FCA regulated and its platform offers you the opportunity to lend money as an investor for a return over a period of time. They also have a borrowing arm of the business.
So far, RateSetter investors (circa 96% are individuals) have lent over £2.5billion and earned over £100m in interest.
RateSetter and others such as Zopa and Funding Circle etc; essentially match-make on the internet. They cut banks out of the equation and are able to pass on the savings to you and me.
The money we lend to RateSetter plays an important role in the economy as it’s further lent by them to creditworthy individuals, business and towards property projects.
Below are some unique points about them:
1. They have a 100% track record. Since launch in 2010, no investor has ever lost a penny with RateSetter. There were 60,938 lenders at the time of writing.
2. Our investment is protected by their Provision Fund. This acts as a buffer for any poor performing loans they make. The fund has so far ensured that every investor has received every penny that they expected.
The way this works is that money from the fund is used to repay investors whose borrowers miss payments or become bad debts. This is done provided there is money in the fund.
However, note that this is not an outright guarantee. Given the record so far since 2010 though, I am confident enough about committing my own funds to it.
The Provision fund itself is held in cash and cash equivalents with major UK banks.
3. There are zero initial fees to pay. However, there is a minimum amount of £10 to be invested.
How Can One Invest? Any Tax Benefits?
There are two accounts available to you for investing via RateSetter. The best part is that both accounts attract the £100 Bonus Offer!
Below are the two routes you can take, although only one of them offers you the benefit of tax-free returns:
1. Everyday Account:
- You can invest in all 3 markets with the current 3-month average return rates below. The longer you invest for, the higher the average return:
- Rolling Market – 3.1%
- 1-year market – 4.7%
- 5-year market – 5.8% (annualised rate based on 30-day average on the 5-year market on 01/12/2018)
- Similar to investing in a savings accounts and completely customisable.
- Minimum of £10 and no maximum limit.
- Your returns are not tax-free.
2. Innovative Finance ISA (IFISA):
This is a new type of ISA that allows you to invest specifically in Peer-to-Peer lending but with tax-free interest.
It was introduced in April 2016 and sits in between the Cash and Stocks and Shares ISA:
The benefits of the RateSetter IFISA are as follows:
- It has all the benefits of the Everyday account but has the added benefit of ensuring that your returns are tax-free.
- Like the Everyday Account, you can invest in all 3 markets – Rolling, 1 year, 5 years.
- The IFISA is flexible and allows you to withdraw funds when you need to and replace them without affecting your ISA allowance.
- There are no investment or annual fees. You do have to pay a transfer fee though if you want to exit your investment early.
- This offers you the benefit of a balanced portfolio as you can invest in this alongside your Stocks and shares ISA or Cash ISA.
- You can easily transfer from your existing ISA into your IFISA.
- It’s simple to make an investment as you simply have to select your term and rate.
- Minimum of £10 investment but a maximum of £20,000 per tax year across all your ISAs: Cash, Stocks & Shares, and Innovative Finance ISA (IFISA)
- Finally, you get the benefit of protection from the Provision Fund.
How Do You Bag The 13.3% Return?
This is ofcourse why you’ve been reading this article and I hope it doesn’t disappoint.
The £100 bonus you receive on a £1,000 investment represents a 10% return over the first year of the commitment.
As at the time of writing, the 3-month average return for investing for one year across both the everyday account and IFISA is 3.3%.
Bringing these together results in a return of 13.3% over a one year period.
Note that according to RateSetter Ts & Cs, the £100 bonus is credited to your account within 30 working days of qualifying. If you're interested in the detail, please read more here.
Also worth noting that the average market return rates since inception are 3.1%, 3.7% and 5.8% for the average rolling, 1 year and 5-year terms respectively.
To get started, simply follow our RateSetter link to open an account or make your investment. As stated before, please note that The Humble Penny receives a small commission if you use our affiliate link.
Let’s Keep It Real And Talk Risk!
Like all investments, investing with Ratesetter comes with a risk label attached.
However, I personally think that this risk is below the risk you get from buying shares, although higher than the risk of holding cash (typically for no return).
As such, the risk has to be viewed objectively, taking into account the track record of the company, the time horizon as well as the current state of the economy.
There are 3 key risks I’d like to make you aware of:
1. No FSCS
The Financial Services Compensation Scheme (FSCS) covers you for up to £85,000 for deposits in a UK bank account.
However, P2P is an investment (not a bank cash deposit) and so carries no FSCS protection.
RateSetter does have built-in protections such as the Provision Fund (above).
Other protections include a first and second charge on properties or the requirement of personal guarantors on loans.
2. Risk of default
Although the risk of a borrower not paying back is low, they still exist!
Defaults rates range from 0.1% to 3% within the industry. Ratesetter states that its actual default rate is 2.23% as at June 2018.
The default rate is probably the area of most concern for most people and should be sensitised for the worst possible outcome.
My main concern as an investor is the possibility that the Provision Fund disappears and my capital starts getting eaten into.
As such, below are some scenario analysis:
- It would take a default rate of about 3.6% for the Provision Fund to be completely used up.
- At a default rate of about 8.8%, we would still receive 100% of our capital back.
It would take some double-digit default rates for actual loss to capital to start happening, which although is highly unlikely, is not impossible!
3. The Platform Could Go Bust
Strictly speaking, your loans are between you and the borrower. So if the platform goes bust, you're still owed.
The platform going bust could be due to gross negligence on the part of the company, which could result in reputational damage.
It could also arise from fraud within the company or even from market forces outside of their control such as a major recession.
Either way, these risks remain a possibility, although I have to stress that my view is that they’re highly unlikely!
One way of overcoming the concern that you’re less likely to get your money back if you invest for 1 or 5 years, is to invest in a rolling market.
This gives you a lower return as expected, but it might also give you some peace of mind initially.
Note that you still get the £100 bonus if you invest on a rolling basis provided you invest £1,000+ for a year.
Where Does A RateSetter Investment Fit In?
As mentioned above, the IFISA sits somewhere between the Cash ISA and the Stocks and Shares ISA.
I pretty much see it as a hybrid between cash and shares. It does not carry as much risk as investing in shares and offers potentially lower returns.
I personally see it as better than cash especially if it’s cash that would sit around for the medium to long-term.
Another way I look at this is as a form of diversification to my portfolio of cash, stocks (via investing in index funds) and property.
It’s an alternative asset class that is closer to cash but not quite cash.
As with all forms of investing, it’s always best not to put all your eggs in one basket. As such, it’s sensible to invest only a small percentage of your net worth in a new alternative asset class.
To conclude, opening a RateSetter account is worth exploring, especially given their 100% track record and the fact that no investor has lost a penny demonstrates.
But it’s not without some risk as one has with any investment.
Opening an account requires only a £10 minimum investment. One could start off small to see how things go, and then invest some more based on their comfort and circumstance.
A £100 Bonus on £1,000+ contribution is certainly attractive, especially where it is a guaranteed 10% return! And this is before the current 3.3% return on a 1-year market.
The decision is ofcourse entirely yours.
However, I’d make that decision fast because it is for a limited time only and last I checked with RateSetter, they said it will likely end in June 2018!
So grab your £100 bonus offer for £1,000+ investment now!
Do you have any questions on P2P or even on RateSetter itself? Please share your thoughts below.