British P2P lending site Ratesetter.com launched recently. Ratesetter uses market approach dominant in the UK (rather then individual listing).
A novel approach is the “Rolling Monthly Loan” Ratesetter introduces:
One of the two types of loan RateSetter offers. For a borrower, this is a bit like borrowing with a credit card. At the end of the month, they pay the interest and a minimum repayment amount. The balance of the loan is then rolled into a new contract (with a new lender). Lenders only lend their money for one month at a time. They lend their money again at the end of the month, but to a new borrower with a new contract.
This is an interesting concept. For lenders it solves the problem with other p2p lending markets (unless they have a secondary market) that they cannot cash early. For borrowers this comes with mixed blessings. While the rolling monthly loan comes with lower rates than a credit card, the rate will change each month (for better or worse).
I do wonder what happens should the lender demand dry out? How will Ratesetter refinance the Rolling Monthly Loans then?
Ratesetter builds a fund as partial shield against bad debt:
Money invested in shares and corporate bonds isnâ€™t covered by the Financial Services Compensation Scheme. Money lent with RateSetter isnâ€™t either, but weâ€™ve set up a Provision Fund to reduce the risks to lenders. Borrowers pay an amount each month into the Provision Fund based on their creditworthiness. The fund is managed by RateSetter so a lender can be compensated if their borrower doesnâ€™t pay their loan on time. All payments from the Provision Fund to the lender are entirely discretionary – we canâ€™t guarantee to compensate lenders from the fund and it isnâ€™t an insurance product. If RateSetter builds up a surplus in the Provision Fund (if weâ€™ve been overly conservative) RateSetter pays bonuses to its lenders (this is paid annually based on how much money theyâ€™ve lent over the year).
The height of the payment into this fund (called credit rate) is dependent on the credit score of the borrower. The website quotes a 1% credit rate as example. The Provision Fund by Ratesetter is the second construct to diminish risks from defaults to lenders after the Anleger-Pool concept by Smava (see articles on Anleger-Pool).
I see two downsides to the Provision Fund concept:
- It is (currently) not tranparent. The market view section gives no information how much money is present in the fund
- Should defaults rise above an expected limit the fund will be empty. While lenders with loans that defaulted first will be protected in full, the ones after could be left empty-handed. However Ratesetter could react to this scenario by raising the credit rates on the monthly rolling loans
The market view shows, that Ratesetter matched funds currently at about 6.3% APR for the rolling monthly and at 8.6% for the 36 month loans.
Ratesetter charges borrowers a 115 GBP upfront fee (for the 36 months loans); 5 GBP per month for the monthly loans and lenders 10% of the interest they earn.
The company was founded by Rhydian Lewis (CEO) and Peter Behrens (COO).