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Why I’ve invested $20,000 in peer-to-peer lending

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Kevin, 54, from Sydney, has been using RateSetter since July 2016 by investing $10,000. He added an extra $10,000 in January.

He has made around $520 on his initial $10,000 investment, equivalent to about 9.4%pa over that period.

Why I chose RateSetter

RateSetter’s returns are better than the banks’. I get an average return of about 9.4%, which is great if you’re comparing it to a cash account of about 2%.

But you’re not able to access your cash, so your money with a peer-to-peer is similar to a term deposit. However, if you look at term deposit rates for three to five years, they’re a third to a half of what you’re getting at RateSetter.

In my experience, RateSetter is one of the easiest P2P platforms to use.

All the P2Ps operate differently. For one of them, you virtually have to choose who you’re loaning to yourself, which I figure is not for me.

With RateSetter, I can decide what the rate is and how much I want to invest. I also find the website really easy to use.

How it works for me

When I’m actually trying to loan money out to people, I look at the website twice a day until it’s loaned out. I’ve got it set on the reinvest option, so when people pay me every month my profits get reinvested. So I check once a week to make sure it has been reinvested.

If you do the reinvest option, your money gets loaned out at the market rate. That’s the only downside to this platform. Market rates can change quite quickly.

If the average rate moves down, my offer might sit there for four weeks and I wouldn’t even know. So I check once a week to make sure that those little residuals have found a new borrower.

Why I like it

It’s just so transparent. I like that if you’re putting out a loan you can see where you are in the “queue”.

You can see how many loans are being approved and how much money people have offered to lend. Sometimes you’ll see you’re in the queue at 9.2% but I’ve got $200,000 in loans sitting in front of me. If that money sits there for two weeks before it gets loaned out, I’m losing. But if I lower my offer by 0.1% it’ll get loaned straight away.

There’s a lot of variability. They give you the stats about how much they’ve loaned out the week/month before and you can see the trends. So you can see, say, for a particular amount that I’m better off dropping the rate by 0.1%.

Over the course of five years, 0.1% of $1000 is $3.80 or something. It’s not a lot but if I don’t have it loaned out for a week I’ve lost that already.

Lessons learned

When I first invested, I just put $5000 into a three-year loan and $5000 into a five-year loan.

As time goes by and you reinvest, each profit will end up in another loan.

In 10 years I’ll have thousands of little loans. If I’ve got $40 invested in a $5000 loan with 20 other people and that loan falls over, I’ve really only lost $40 at most. I know RateSetter has the provision fund but I don’t know what’s going to happen in the future.

It’s a risk thing for me. When I topped it up in January, I just put it all on in $500 increments. I put $500 on one day, and it found itself a loan.

I put $500 on the next day, and it found itself another loan. That way I’ve spread out my risk. I didn’t think about that until after I had started.

Tips for others

Cut up your investment into smaller loans because an individual loan could fall over.

To date, they claim they’ve covered every bad debt ever through their provision fund. They’ve got a lot of money in the provision fund but I don’t want to be that 1% that they don’t cover.

How you can do it

RateSetter is a peer-to-peer lending platform. You select your lending market, amount to invest and interest rate and RateSetter selects the borrower (which could be an individual or a business).

The minimum investment is $10 with no maximum currently.

Your invested amounts can be lent to individuals either whole or as part of a loan. For an investment term of five years, the current interest rate is about 9%pa net of fees. Interest is paid to lenders monthly and can accrue in a holding account or be reinvested.

RateSetter charges lenders 10% of gross interest earned on loans. In case of borrower default, you can apply to be compensated via the RateSetter provision fund. This money comes from charges paid by borrowers.

It is not a guarantee or an insurance product – if it has insufficient funds to compensate you, RateSetter will direct you to a debt collection agency. Earnings you make are taxable.

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