Should I Sell RateSetter Loans?

One of my colleagues wrote a 4,000-word report on RateSetter, explaining some recent troubles it has had as well as his opinion on whether individual lenders should sell RateSetter loans now.

It's called Fact Check: RateSetter Hit By £80m Of Struggling Loans.

I know that many of you don't have the time to soak up thousands of words, so here's a briefer summary of his main points and conclusions:

£8.5 million in struggling loans

Approximately £8.5 million in RateSetter loans could be classed as struggling loans. Not £80 million as reported by The Guardian! This all comes from a ginormous loan to a company called Adpod.

RateSetter has admitted its mistakes here and taken very solid steps to prevent it happening again.

And it will swallow any losses from this loan itself, rather than use its separate reserve fund pot. This does slightly increase the risks at RateSetter, but RateSetter seems to have the financial situation and plans to take on that risk with no losses to lenders.

The other £70 million of what The Guardian incorrectly called “struggling loans” to VTG and George Banco is nothing to be concerned about based on the current information. These loans are actually sub-loaned to hundreds or thousands of other borrowers, spreading the risks.

Maybe some of the loans to VTG might suffer higher than average bad debts, but RateSetter expects repayments to fully cover repayment of the lent money. RateSetter has also, in its usual way, stocked up its reserve fund for each of these loans, so that it continues to pay out all the interest due on any of these loans that go bad.

The loans to George Banco are totally fine, with all repayments and interest on time. So that was a non-story, really.

Risks have risen, interest rates have fallen

RateSetter has outstanding loans of £630 million (dwarfing the £8.5 million of “struggling” loans).

Three factors have combined to noticeably weaken the risk-and-reward balance of these loans for RateSetter lenders:

• The risks on all these loans have risen; for example, more than twice as many of RateSetter's personal loans are either late or have gone bad: 70 in 1,000 loans.
• RateSetter has shrunk its reserve fund from 3.9% of total outstanding loans to 3.4%.
• Probably the biggie is not higher risks but lower interest rates. These have sunk from a peak close to 7% down to an average of 4.36% in the five-year lending account over the past three months. (RateSetter's other lending accounts have both been averaging under 2.7%.)

Any of those factors by themselves probably wouldn't be a big deal; it's the combination that does it.

RateSetter's 4thWay PLUS Ratings downgraded

The 4thWay PLUS Ratings, based on international banking methods, are tough and strict on P2P lending sites, with the intention of giving individual lenders a large margin of safety even during major financial crises.

RateSetter's five-year lending account still has a 4thWay PLUS Rating, albeit downgraded from the top 5/5 PLUSes to a still highly creditable 4/5 PLUSes.

RateSetter's other two lending accounts no longer have PLUS Ratings. This is due to them failing our tough-bordering-on-mean tests that model their potential results during a very severe recession and property crash. The zero rating here shows that bad debts might exceed interest earned at that time.

This isn't like Royal Bank of Scotland collapsing

Take a deep breath. This ain't so bad.

You don't need to rush to sell, even if you are using RateSetter's shorter-term lending accounts.

RateSetter is still a skilled operator even if recent lending doesn't appear to offer that huge margin of safety that we like to see, based on our standard methods and statistical tests.

You probably have earned enough interest at 3%-6% per year already to easily pay for any potential losses in a real disaster period, which would certainly be closer to a one-off 5% temporary loss rather than the 35% shock you could experience with the stock market.

Alternatively, if you choose not to sell, it is far better to re-lend your repayments and interest and be prepared to lend for years if necessary. This hugely reduces the risks and so is likely to protect you from losses.

What is essential, whether or not you continue to lend through RateSetter, is that you just lend through P2P lending sites that you personally feel highly confident about and that you spread your money across lots of them. Quite a few sites currently have 4thWay PLUS Ratings, so you could start your research with those.

How to sell for no fee before 18th August

If you are a RateSetter lender, you should have received an email explaining that you can currently sell your loans and exit early, if you want, and RateSetter will waive the exit fee.

To do so, email investoroption@ratesetter.com before the 18th August.

Read Wellesley* Is Still A Sell.

Why Growth Street* Is Number One.

Read the 4thWay RateSetter Review, written by one of the UK's foremost authorities on peer-to-peer lending.

Update: RateSetter has offered updated figures on loan amounts outstanding, which is now at £632 million. Its reserve fund is also therefore a higher proportion of loans outstanding at 3.4% rather than 2.8%. These new figures will not impact RateSetter's PLUS Ratings.