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Tuesday, 21 March 2017

Ratesetter: Peer-to-Peer Lending

Have you ever looked at the huge fees and interest rates that personal lenders charge and thought 'damn, I wish I could be on that side of the equation'. While banks and credit unions are offering us a piddly 3% interest rate on 'bonus' saver accounts, they are charging 13-20%. Someone is making a killing there, and it's not me.

Enter RateSetter, where you can be the lender and reap the profits.

Basic concept

RateSetter and other peer-to-peer lending companies act as the middle man between you and someone who wants to take out a loan. Personal lending is rife with risks, what if they don't pay you back? What if you lose a friend over this? What if you don't lend them the money and you lose a friend for refusing to 'help'? My favourite author Patrick Rothfuss used the phrase "There are two sure ways to lose a friend one is to borrow, the other is to lend", or for a classic version from Shakespeare himself, "Neither a borrower nor a lender be; For loan oft loses both itself and friend."

RateSetter place themselves as a middle man between you and the borrower. This creates a lovely layer of protection between you and the borrower (you could be lending to your mother and you'd never know!) as well as opening up a huge pool of borrowers for you.

You can get started for as little as $10 which almost matches the minimum Acorns investment of $5. RateSetter doesn't have a nice mobile app like Acorns does, but it exposes you to a different market and (in my experience) has far better returns. 

Pros: Easy to start, easy to use, low fees

RateSetter has a slightly tricky menu that could do with some better labels, but you'll get your head around it in about five or ten minutes. They give you a variety a ways to deposit funds, either by RateSetter pinging your account using POLi payments, or you can use BPAY to send money across. I haven't used POLi, but BPAY deposits are generally processed within 48hours.

Once your funds arrive, you jump over to the lending tab and pick your market. You can lend for 1 month, 1 year, 3 years or 5 years. In the 1 month market you receive all your investment plus some interest back at the end of the month, generally for a rate around 3.5 - 4%. In the one year market you receive small interest payments throughout the year, and you investment back as a lump sum at the end. One year markets generally have a rate of around 5%. Honestly, neither of these offer enough return to be worth using in my opinion.

RateSetter shines in the three and five years markets. Each payment returns a small around of your principal, plus an interest payment (just like when paying off your own mortgage). The three year market is currently offering 8.4%, and the five year market is at 8.7%, though it tends to hover closer to 9 or even 10%.

The fees are quite reasonable - RateSetter takes 10% of your earnings, rounded down. That sounds like a lot, but when weighed against a 9% return, it works out really well. e.g. lend $1,000 at 9%, that's $90 a year. You get $81, RateSetter takes $9. You have still made 8.1% on your investment. But also, because you can deal in teeny tiny $10 loans, and their cut is rounded down, I quite often have an interest payment of  7 or 8 cents, which RateSetter won't take any of. In my February goals update RateSetter made me $78, 2% of my financial independence needs!

Next up in brilliant features is the reinvestment settings. By ticking a couple of boxes (that you can change anytime) you can ask for all repayments to be automatically reinvested for the length of time your choose at either market rate, or your set rate. If you set a rate and the current market rate is higher, your funds will be invested at that higher rate. You can also split it by loan term ,so your 1month loans can cycle endlessly in the 1 month market while building a separate nest-egg in the five year market.

And finally, RateSetter has a provision fund. Fees collected from borrowers are stored in the provision fund so in the unlikely event that a borrower defaults you can claim back your initial investment. Unfortunately the provision fund won't pay any missed interest, but in eight years of business RateSetter has not lost a single dollar. That's a wonderful track record!

Cons: Medium risk, locked in funds

Okay, I've gushed about how much I love RateSetter, let me talk about the things that are less than perfect.

Lending money is risky. This isn't like a term deposit where the bank is super solid and there are government checks and balances to protect you. This is a company who has promised to protect you, but they are a business, and you are a lender. Loans sometimes default, it's a fact. So peer-to-peer lending falls into the Medium risk category. Some might say high, but the track record and provision fund make me willing to call it Medium.

Next, the terms. Your money is locked away for five years. It's a pain in the proverbial. When I started I was using all four markets for variety, before realising I much preferred the five year terms and started switching my money over. I started using RateSetter in November 2014, I changed to only lending in the five year market in March 2015. I still have money stuck in the three year market. And it's there for another year. Stuck because of a choice I made two years ago. No getting rich quick with RateSetter, just a long slow build. On the upside though, once you hit FIRE, you can change your reinvestment settings to reinvest your principal and pay out the interest to you. Easy cash flow for your retirement income!

And finally, the one little thing that offends my delicate sensibilities. RateSetter's biggest business is car loans. Mr FIRE and I are a one car family (with four bikes!) and scoff at people who take out car loans! But I guess I should be grateful that their financial choices are funding my retirement!

RateSetter are currently offering a $75 sign-up bonus if you invest $2,000 before the 15th of April. This referral link will also give me $75 (thanks) but will only work for me five times. If you chose to sign up, you will get your own referral link to share with your friends.

RateSetter aren't currently offering any sign up bonuses, but that doesn't minimise their appeal to me. After fees, I'm earning more than 9% per annum, and after four years I can honestly say I am very happy with my investment.

Links to RateSetter are referral links.  If you have any experience with peer-to-peer lending, I'd love to hear your story!


  1. I've never used a peer to peer lending service but I am very interested in diversifying my risk and get another stream of passive income. I'll definitely need to check it out. Thanks for sharing!!!

    1. No worries at all! From your blog I believe you're in America? RateSetter doesn't operate there (that I know of, they started in the UK) but I've seen reviews on Mr Money Moustache and 1500 Days for the Lending Club and Prosper, might be worth digging in to.

  2. I'm super interested in it - but there are heaps of Peer-to-Peer lenders coming up in Australia. Have you looked at the others? What made you choose this one? I've got a pretty high risk tolerance level, but know next-to-nothing about shares so I'm not touching those yet!

    1. This comment has been removed by the author.

    2. I did some super technical research and found out RateSetter were the first ones! Haha, but seriously, I was following RateSetter and Society One for about two years before they made it into Australia. After watching RateSetter for so long I was more than happy to pounce when they arrived.

      I think RateSetter kicked off in Australia in late October 2014, I started tracking my investment with them in November. They had a couple of really minor technical blips at the start and their customer service was amazing. I'm 100% happy with them and always encourage friends to sign up.

      Edited for a typo that made the comment completely nonsensical :p

    3. I am absolutely signing up for it right now! I like to know there are other 'real' people out there who have road tested these products. I've been looking for a good way to invest at a rate that is higher than the 4.10% of my mortgage.

      [Awkward, my link to my blog was incorrect on my previous comment.]

    4. Glad I'm not the only one with awkward typos!

      If you want the $75 sign up bonus, make sure you use the affiliate link above. I mean, I'll get a bonus too (woo!) but I would still recommend them without it. I actually had the post 3/4 written when they announced the sign-up bonuses. Wonderful timing for me!

  3. I recently joined thanks to their $75 bonus and, following your suggestion, started investing in $10 amounts. One question: how do you track all the mini $10 payments and repayments as after a while they become hundreds?

  4. Honestly I don't track the individual loans, just the overall balance. The way RateSetter reinvests means that you quickly end up with hundreds of tiny $10 loans and keeping track of each one just isn't feasible. You can go through your statements to see how each loan is performing, but the one and only time I had a payment issue RateSetter notified me before I realised and they got the account balanced out with the next payment.

  5. Hi Eli / GGwatchman - just a reminder you need to lend at least $2k in the 1year, 3year or 5year markets if you want that $75 sign up bonus. Sorry if I wasn't clear about that in the post :)

    Even if you aren't chasing the bonus, I hope you're liking RateSetter so far

    1. Yes I'm enjoying it, I already received my signup bonus, it took about 1 week.

      Thanks for the reply. I was planning on tracking the payment of interests as I believe the pds is not clear when a payment default occurs on how to claim money from the provisional fund.

      From what you mentioned, it sounds like Ratesetter notifies you of a late/default payment and then provides money from the provisional fund to cover that shortfall (provided you make a claim?). Is that correct?

    2. My payment issue wasn't actually a default but a minor glitch when RateSetter was doing changes - they slightly overpaid some people and slightly underpaid others. I didn't even notice to be honest.

      I have yet to have someone default, so I'm not sure how the process works. All my interactions with their customer service have been absolutely stellar, so I have no doubts that if I had a concern I could contact them directly.

  6. Hi LadyFIRE,

    Consider me a new loyal follower. I've just read through about 12 of your posts and it seems we are at about the same age (26?) have very similar goals and strategies (minus the real estate for me).

    Regarding RateSetter, I've only started with them two months ago and so far I love it. I just wanted to ask you about your approach with them. I currently invest in $200 packages to space my loans out - the goal being that no two packages end up in the same loan to reduce the risk of loan default.
    Thoughts? What do you do?


  7. 26 indeed :) nice to meet you stranger!

    When I started with RateSetter I made a point to invest in smaller chunks - $100 max. It was a bit fiddly to take the time putting out heaps of loan orders, but it made me comfortable that they wouldn't default.

    A couple of years on I have hundreds of $10 micro-loans from reinvestments and reading my statements is a pain.

    The other thing though is just because I lent three batches of $100, doesn't mean I lent to three different people. It could be that one person popped up needing $3,000 and took from me and a group of others. I have no way of knowing. I suspect that if a lot of small loans (like my reinvestments) are matched at the same time, they've actually all been picked up for the same loan.

    I would be more likely to break up the investments in the hope that some of them would hit a bigger rate of return.

    Mr. FIRE had been saving for a home deposit and realised he had more than he needed. He wasn't comfortable lump sum investing in the share market in it's current state, so he threw it at RateSetter. A couple of hours after offering it, he secured an $11k loan with a 9.1% return!

    Rates quickly dropped back to 8.8% so if he spread it out he may have missed out.

    Long story short - I'd throw it all in quick as possible. They days you aren't earning cut into your returns, and you have no way to guarantee who is behind the loan. RateSetter has yet to lose anyone's money in Australia or the UK thanks to the provision fund, so I'm not worried :)


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