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.
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!
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.
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 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!
