Author Topic: UK P2P - Ratesetter.com?  (Read 3383 times)

Annie_B

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UK P2P - Ratesetter.com?
« on: October 18, 2014, 10:59:39 AM »
Hi all,

Sharing this as I haven't seen it posted elsewhere and it might be of interest to some.

Ratesetter is offering a 50 referral payout (that's 50 each to the referrer and new customer) until 31st October (normally it's 25).

Referral fees are free money aren't they? (well almost). For me personally, I thought it was worth the 15 minutes or so it takes to register and satisfy the referral criteria.

I must be honest I've only been using Ratesetter for a short time and it's my first experience of P2P. Time will tell if it's something I'd like to persue medium-long term, so I've only loaned a small amount while I get a feel for it. I'm still very much a beginner trying to learn about investing, and am finding MMM's blog and forum really good reading!

I don't want to look like a spammer so I won't post my personal referral link here, but if anyone would like to use it please drop me a message.

More generally, have any of the UK Mustachians used Ratesetter or other UK P2P companies and what are your opinions?


Doubleh

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Re: UK P2P - Ratesetter.com?
« Reply #1 on: October 18, 2014, 11:45:28 AM »
I've been using both RateSetter and zopa for the past 18 months or so. To be honest I question the use of p2p for most people when generally your stache will be better off long term in the stock market. p2p to my mind appeals a lot to people who don't understand the risks they're taking and think it's like a bank account (not suggesting for a moment this is you!).

That said I've found RateSetter overall a much better experience than zopa. Rates are substantially better, money is lent out more quickly and the whole experience feels slicker. Note also that zopa has in the time I've been with them changed their business model to be very similar to RateSetter ie you don't choose the risk level of loans yourself and they have a provision fund which protects you against defaults, in theory at least.

In short I wouldn't of more money into zopa, RateSetter I'd be happy to if it was right for me and I'd recommend them to someone provided they understand what they're doing and the risks involved

Annie_B

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Re: UK P2P - Ratesetter.com?
« Reply #2 on: October 18, 2014, 03:39:45 PM »
Thanks for your reply, it's nice to get some input from someone who's been using it for a while.

I question the use of p2p for most people when generally your stache will be better off long term in the stock market. p2p to my mind appeals a lot to people who don't understand the risks they're taking and think it's like a bank account
I completely appreciate what you're saying about P2P appealing to a broad customer base who might not understand the risk, especially as it's so easy to start lending. I notice Wellesley withdrew their TV ad as it wasn't considered clear enough regards the risk.

I do a little bit of risk assessment in my job albeit in a different context, so hopefully I've made an informed decision about this rather than being sucked in by marketing. At least that's what I'm telling myself :-). I can't argue with Ratesetters statement that no lender has lost a penny of capital (so far...)

Also will be interested in seeing what comes out of the ISA consultation.

Ultimately I do want to get into investing in the stock market, but am not yet confident enough. Lots more reading/research to do, I will get there though!

PovilasP

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Re: UK P2P - Ratesetter.com?
« Reply #3 on: October 20, 2014, 12:08:03 PM »
Read other threads about UK in this forum.

Also, you kind of should start in ISA, because every year you can put there 15 000 . Which will be tax free, except for dividends. Anyway, event dividends tax will be the "minimum", no matter if you are high tax rate payer.

Also, there is free from tax capital gains per year of 11 000 . So, at the beginning ISA can look like not such a big thing, but have in mind that somewhen you'll have like 200 000 there and will want to cash out sometimes quite big amounts.

Finally, the ISA accounts often gives better deals than regular investing accounts, like not being inactivity feed and so on.

daverobev

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Re: UK P2P - Ratesetter.com?
« Reply #4 on: October 20, 2014, 04:28:40 PM »
Read other threads about UK in this forum.

Also, you kind of should start in ISA, because every year you can put there 15 000 . Which will be tax free, except for dividends. Anyway, event dividends tax will be the "minimum", no matter if you are high tax rate payer.

Also, there is free from tax capital gains per year of 11 000 . So, at the beginning ISA can look like not such a big thing, but have in mind that somewhen you'll have like 200 000 there and will want to cash out sometimes quite big amounts.

Finally, the ISA accounts often gives better deals than regular investing accounts, like not being inactivity feed and so on.

You don't get taxed on an ISA, full stop.
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FreeOnABike

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Re: UK P2P - Ratesetter.com?
« Reply #5 on: October 27, 2014, 04:08:36 PM »
More generally, have any of the UK Mustachians used Ratesetter or other UK P2P companies and what are your opinions?

Hi Annie,

I'm new here too, dipping a toe in the water.
To do some learning I invested 200 with fundingcircle.com earlier this year.  In their model that is 10 different loans of 20 each.  In the interests of sharing my experiment more widely:  My gross annualised return is 9.5%, and fundingcircle predict 6.0% after fees and bad debts.  So far there are no bad debts, so my net return is 7.8%

This is pretty good on the face of it, but I'm under no illusions.  I have so few eggs in the basket, if just one of them turns into bad debt it would take my return below inflation.  The blog has quite good information, including details of which loans default - about 3 or 4 a week at the moment.  For that reason I'm treating it purely as an experiment, aiming to get enough confidence to one day invest fully enough that the cost of bad debt is averaged down. 
https://www.fundingcircle.com/blog/

It may be possible to lend tax-free through an ISA soon.  So it's possible that my confidence experiment may bear fruit one day...
http://www.bbc.co.uk/news/business-29653476

Doubleh

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Re: UK P2P - Ratesetter.com?
« Reply #6 on: November 03, 2014, 12:45:58 AM »
Freeonabike, the big risk with funding circle is that in the event of default you are still liable to pay tax on your gross interest, with no offset for the losses. This means that in the event of any loss you can be left with capital loss and still a tax bill to pay.

This is a problem for the whole industry not funding circle but they are especially exposed because their model lending to small businesses results in higher gross interest and higher expected defaults. Meanwhile many other sites including RateSetter and zopa have taken the alternative approach of creating a provision fund to cover defaults, giving lower gross return but also much lower risk of individual loss. This means they function more like a bank account, but with the big caveat that they are exposed to black Swan risk of multiple defaults overwhelming the fund in which case you would be unprotected.

This unbalanced tax treatment is one reason there is a move towards allowing p2p within isas but in the meantime could present a nasty surprise

FreeOnABike

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Re: UK P2P - Ratesetter.com?
« Reply #7 on: November 03, 2014, 03:58:31 AM »
Freeonabike, the big risk with funding circle is that in the event of default you are still liable to pay tax on your gross interest, with no offset for the losses. This means that in the event of any loss you can be left with capital loss and still a tax bill to pay.

Hi Doubleh,

I think I understand this, but I just want to confirm the logic with an example: 
I lend 200, and 1 loan of 20 defaults. 
Do I:
1)  Pay tax on the capital gains made by the remaining 180, and the 20 is lost. 
That seems reasonable to me. 
2)  Pay tax on all the gains up to the point when the 20 loan defaults, including on the 20?
That seems less fair, but still the tax is insignificant next to the capital loss. 

In my case (since I'm experimenting with only 200), both are bad, because I would lose 10% of my capital with just one loan default.  But with 5000 invested, each loan would represent 0.4% of the total capital, so the tax lost on gains from defaulted loans would be an even tinier fraction of the total picture.  Assuming case 2 above is true, at 40% tax rate the lost tax would be 0.4% capital x 6% gain x 40% tax rate = 0.0096% of the total investment.  So each default would "cost" 0.4% capital loss + 0.0096% tax = 0.4096% of the return.

Have I misunderstood?

Doubleh

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Re: UK P2P - Ratesetter.com?
« Reply #8 on: November 03, 2014, 05:59:20 AM »
I think you have misunderstood; the problem is that the tax completely ignores your defaults. You pay income tax at your marginal rate on the full amount of interest, and you get no reduction in tax because of your loss. This is different to most areas where you can use losses to reduce gains. So for example you invest 200, earn 10% return and have a complete default on 1 loan of 20, assuming uk higher rate taxpayer:

Investment:                 200
Interest at 10%:            20
Tax on interest at 40%:   -8
Lost capital:                  -20
Value at end of year:     192

This is a big simplification and the position is actually slightly worse as you pay fees to the platform as well. Of course the larger the number of loans you have the less the impact on your portfolio of an individual default, so someone in your position with a small portfolio could potentially suffer a large percentage loss.

For more explanation of the potential risk there was a good discussion with a representative of funding circle on bbc radio 4's money box programme http://www.bbc.co.uk/programmes/b04bj7py

Please note I'm not trying to criticise funding circle, just highlight the tax problem. Because of the way their business model works it impacts them more than some others eg zopa and ratesetter who cover defaults centrally to avoid any one investor being hit disproportionally.

FreeOnABike

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Re: UK P2P - Ratesetter.com?
« Reply #9 on: November 03, 2014, 09:12:45 AM »
You pay income tax at your marginal rate on the full amount of interest, and you get no reduction in tax because of your loss. This is different to most areas where you can use losses to reduce gains. So for example you invest 200, earn 10% return and have a complete default on 1 loan of 20, assuming uk higher rate taxpayer:

Investment:                 200
Interest at 10%:            20
Tax on interest at 40%:   -8
Lost capital:                  -20
Value at end of year:     192

Gotcha, thanks Doubleh.  Actually I think I had caught up with your thinking, I just didn't do a good job of explaining it. 
I've done a spreadsheet model now showing the effect of loan defaults, including the fee, tax, and inflation.  The end result for me is that tax (not on defaults, just generally), and my lack of capital make it difficult to beat inflation once likely defaults are taken into account.  Thanks for helping me understand in more detail.  The picture improves a little once you diversify with around 5K, and a lot once P2P loans are allowed in NISAs in the future. 

I agree, having P2P as an option is a good thing.