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RateSetter Lending Strategy

By Matthew Howard on 20th October, 2015 | Read more by this author

Here is the RateSetter lending strategy. RateSetter is one of the simplest and easiest P2P lending offerings available.

Lend using the market rate

Most of us using RateSetter lend and re-lend our loan repayments automatically using the “market rate”, which is the average rate achieved the previous day.

Currently you can expect to lend your money within a day, so there's little point in lending for less than the market rate.

I don't see this as a bad thing that lenders switch their minds off and go for the market rate. With some P2P lending websites, it can mean you lose out on considerable interest. Not here though. That said, you should keep an eye on the rates you're able to get and set floors. A simple way to do this is to watch RateSetter's 4thWay's PLUS Ratings, which will get worse as the interest rates fall.

(If you sign up to our newsletter using the form below we'll keep you informed of changes to PLUS Ratings and what the cause was.)

Boosting your interest

If you're interested in boosting your interest, though, then switch off the market rates option and go get that extra 0.1%! Because that's pretty much all you can expect to get by bidding higher rates than the market rate.

You might sometimes have to wait days or weeks to get your money lent out, but so long as you generally don't have to wait more than about two weeks it should prove worth it. Provided that was worth your time for another 10p per £100 you've lent.

If you find your money is not being lent, watch the queue of money to see whether you're moving forwards and are likely to lend soon.

Be vigilant

When setting your own rates, RateSetter will continue to re-lend any of your loan repayments and interest at that rate (provided you have set your account to auto-lend both). It won't increase your rate when the market rate rises.

You will need to check into your account frequently to ensure your rate is still attractive.

Watch the rates

If you keep an eye on the interest rates, you can take advantage of the spikes that occur fairly regularly, often around the middle of the month, with the peak on day 21 of the month. Set your monthly contributions to occur around then.

You can deposit money instantly with a debit card at no charge if you deposit at least £1,000. So you could leave your money somewhere else earning interest and deposit it in RateSetter when you see that rates have hit the figure you're interested in.

Choosing your minimum interest rate

You have to decide what the minimum acceptable return is for you for the risks you're taking.

At time of writing, RateSetter is receiving our top two 4thWay PLUS Ratings of either 4/5 or 5/5 five PLUSes. This means that according to our strict tests using international banking standards, the interest rates currently look very attractive compared to the risks, even during an very severe recession and property crash.

The danger with RateSetter is that lenders might come to see it as so safe that they pile in too much. This will force rates down to practically savings levels. RateSetter should have backstops in place to prevent this, but that might not be enough if lender demand overwhelms them.

Spreading your money around

RateSetter intends that it's very large bad-bebt provision fund will pay all losses.

Even if the bad-debt provision fund fails, all the loans will then be pooled and all remaining losses not covered by the fund will be shared between all lenders, so that you all get back, say, 97p in the pound.

Your risk is effectively spread across all outstanding loans, which is how RateSetter offers the widest coverage of all P2P lending websites.

Slice up your loans

If you are one of those curious RateSetter horsetrader's who finds himself switching between the one-year market, the five-year market, the monthly market and back again, I want to know why your horses are so wild that you can't stick with any of them.

Whatever your reasons for switching your loans constantly, you could make things easier on yourself. Don't re-lend a large amount of money all at the same rate. Put some of your money in at, for example, 5%, some at 4.9% and some at 5.1%.

This means that if you want to change horses in the middle of the stream, you can switch some of your money to another loan market without losing your place in the lending queue for all of your money.

Lend over several weeks

At least while you're getting started, there is an advantage to lending your money over several weeks. By doing so, you get your money into more different loans. While you don't need this to reduce risks, it could be useful to avoid lending £1,000 today and have it all repaid next week by a very good borrower. You'll only have to re-lend it all again.

After you've been lending and re-lending your money for several months, your money will naturally be more spread out so this problem will be smaller.

Lending at different rates (like the horsetrader) will probably also help you spread your money around a bit more to begin with.

Don't rush to get RateSetter cashback

We've noticed that when RateSetter has offered cashback to lend over a specified period the interest rates have been plunged downwards.

The benefits of receiving the cashback are wiped out by the huge number of lenders piling extra cash in and pushing the rates down.

Last time I checked the results of this, I think most people probably ended up worse off by waiting a few weeks before lending so that they lent during the cashback period. (And thats even if they re-lent the cashback to earn extra interest.)

The bottom line is: don't wait to lend through RateSetter in special cashback weeks, because you can't expect to be any better off. And don't put in any more money than you would have done in a non-cashback week.

In addition, the interest rates after a cashback period can stay lower for longer. This is because the cashback attracts people who lend even more money in the future. The number of borrowers has to catch up again.

If you lend regularly through RateSetter, perhaps set minimum interest rates during and just after any special cashback periods.

Risk watching

A very low risk P2P lending company might come with low chances of losing money, or losing to inflation, today, but tomorrow it be an altogether different opportunity.

Signs to watch for that RateSetter is losing its disciplined approach to selecting borrowers include:

  • A falling 4thWay® PLUS Rating or a rising 4thWay® Risk Score.
  • The number of loan applications that are accepted are rising.
  • Bad debts or late payments rising more than you might expect in the current economic environment.
  • Bad debts or late payments rising much faster than RateSetter's most similar competitors.
  • The bad-debt provision fund shrinking dramatically.
  • Lower transparency standards, e.g. the company stops revealing any of the above information.

(Sorry for another plug, but I think it's appropriate: 4thWay will keep you apprised of any changes to RateSetter's circumstances if you sign up to our newsletter (below). You can also check the details for yourself in our detailed comparison tables.)

Selling your loans

You can't sell loans at a profit on RateSetter, but you can at a loss if interest rates have risen a lot since you lent your money out.

If you need to sell your loans before they're repaid, you have to hope that interest rates haven't risen since you lent. Otherwise you'll have to compensate the lender who buys your loan parts off you so that they don't lose out. Luckily, the vast majority of the time, any compensation you pay will be nothing compared to the interest you have earned in between.

Selling loans on RateSetter is currently easy and quick, although there will be times when it takes longer, such as when lots of lenders want to sell at once. With RateSetter being very low risk, a huge stampede for the exit is unlikely.

The 4thWay® PLUS Ratings are calculations developed by professional risk modellers (someone who models risks for the banks), experienced investors and a debt specialist from one of the major consultancy firms. They measure the interest you earn against the risk of suffering losses from borrowers being unable to repay their loans in scenarios up to a serious recession and a major property crash. The ratings assume you spread your money across hundreds or thousands of loans, and continue lending until all your loans are repaid. They assume you lend across 6-12 rated P2P lending accounts or IFISAs, and measure your overall performance across all of them, not against individual performances.

The 4thWay PLUS Ratings are calculated using objective criteria that can be measured and improved on over time, although no rating system is perfect. Read more about the 4thWay® PLUS Ratings.

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