Have Ratesetter Stopped Lending Again?

I noticed the other day that the RS average borrower rate is actually a little higher than I had thought previously. According to RS the 12 month rolling average is 11.3%.

That's still not as high as Lending Works (which is roughly 13% over the last year, and is much more comparable with RS than FC in terms of borrower type) but still perhaps doesn't suggest absolutely top drawer borrowers either given the current historically low risk free rate.

From the same page I linked to, it's interesting to see the breakdown of that 11.3%:

4% goes to the PF
3% goes to RS in fees
And until very recently investors were given the rest, 4.3%.

Now, post COVID-19 reductions, it's presumably more like:

6.15% goes to the PF
3% goes to RS in fees
2.15% goes to us.

That still doesn't really tell the whole story though, as the 11.3% pre-covid wasn't quite fat enough to hold its 3 components. It was (roughly) another 1% short because defaults were higher than expected.  This was being absorbed by the PF cash declining month-by-month (from about £14m 12 months ago to £8m just before COVID struck from memory).

So, actually, we had really needed a 5% borrower contribution to the PF all along to ready the ship pre-COVID - not to grow the PF, just to see it not continue to fall.

Now, post-COVID, well, who knows. 6.15% seems like quite a modest step from 5% really given the rather dramatic situation. But, as yet our borrower incomes are probably largely being shielded by all of the Government cash being blown about. 

So I suppose in RS's case it mostly depends how well our fragile borrower cohort emerges from furlough, when it finally ends. I (now) have money with neither, but if I had to choose I'd probably prefer it to be with RS (lent to individuals) than FC (SME's). People may still have money to repay loans by and large, but probably won't be so interested in various SME's for the short-term, for a variety of reasons (mostly boiling down to economic+health concerns).

I'm not in huge disagreement with where you're heading, but I do think you need to watch your assumptions carefully. There's another one in here - that every £1 of RYI means £1 less on the loan book. Not at all, or even anything close - if I invest (or reinvest) £1 and that £1 buys your RYI then the net change in the loan book is zero. I'm not saying that this would account for all of the RYI, but it's certainly not 0%. My suspicion, which I can't validate, is that most RYIs are being funded by auto-reinvests from hands-off investors.

But, as I say, I'm in broad agreement about the general direction. RS have a decent chance of emerging from this crisis intact, but they are likely to end up with different products and possibly a smaller loan book - or, more likely I think, there will be consolidation across platforms which might achieve the required cost savings.

The last update on the size of the loan book at the start of April as per the stats page is 830,694,865 pounds. The start of March figure was 874,846,235 pounds. So a fall of 44,151,370 pounds in a month. 650m as an estimate for the size of the current loan book may be a bit low.

The May and June figures will give some indication about how quickly the loan book is shrinking. Of course less loans are being written but also some loans are being deferred.

April lending was 22.4m Euros, 69% lower than the same month last year. I expect it will fall again in May. RS display the weekly lending volumes in pounds on their website.

RateSetter told us last year what a typical month looked like.

Each month around £50m comes in via borrower repayments in interest and capital to lenders. £20-30m comes in from new investments each month. This means there is £70-80m of liquidity each month, from which they can process withdrawals and match to new loans. Of course we are not in normal times now and there are no new lenders signing up for now. So these numbers will be different.

On the APR, from my experience higher interest rates are typically associated with higher risk.

The trick is always in the pricing of risk but also looking for low risk opportunities where borrowers are not always as price sensitive as they should be...

For example the gifgaff loans via ratesetter have an average Apr of 18.9% Apr, but perhaps people on the whole make sure they pay their phone bills rather than other bills...

It is very much reliant on the knowledge, experience, processes etc. of the platform to correctly price risk and look for opportunities.

It will take at least 12 months I think to see how much of the deferred payments will be repaid in full or in part, and how many people sadly are unable to pay for whatever reason. I think it is hard to assess right now.

Good spot. Updated to keep accurate.

Be interesting to see how much it falls. Am not sure about 80m as normal borrower repayments in a typical month were 50m last year according to RS. I expect large property loans skew individual months. Certainly seems like a fall over 50m seems possible.