Peer-to-peer lending in Australia effectively commenced in 2014 with RateSetter opening doors to retail investors and more than 21000 lenders are officially on the books now.
67 months since inception and I have been a lender for the last 56. And although 56 is no significant milestone of any kind, here is my journey visualised with some data.
As always, let’s get one thing out of the way from the start. This post is in no way endorsed by RateSetter nor should this be seen as financial advice of any kind! I am merely a peer to peer investor and care about my RateSetter loans.
Volatile Times = Volatile Rates
As a lender, you are in it for the attractive interest rates. While it is broadly documented and understood that there is a fair amount of risk involved, the exact levels are still uncertain as the industry is yet to make it through an economic downturn. And so being at the very start of a possible downturn, the peer-to-peer industry is in the middle of unprecedented times and it’s unclear where this may lead.
On a side note, the word “unprecedented” gets thrown around a lot nowadays. So much so that, according to Google Search Trends, it reached an all-time high at the end of March.
This is blatantly obvious looking at the weekly average interest rates across the lending markets. While rates have been decreasing for a while, broadly following the RBA Offical Cash Rate chase towards zero, it has been the last few weeks which have been “unprecedented” as rates began to converge.
Changing the time frame shows nicely how all rates merge into a big melting pot of rates and dramatically invert on themselves.
It should be noted that these are average rates as published by RateSetter, every lender will know that there are equally dramatic rate adjustments over the course of every day.
The yield for the long-term loans dropped below that of short-term loans, which is not only very unusual for RateSetter, but it is usually understood as a sign of investors near-term confidence disappearing from markets. Remember how in 2019 the US 10-year bond yield curve dropped below the 3-month curve and it was interpreted as a sign of a pending recession? What you are seeing there is the RateSetter equivalent.
But not all of RateSetter’s markets have been impacted. The two markets not represented in the graphs are renewable energy-related and have been comparably solid throughout this period. This is because both markets tend to represent lower long-term risks, as I have explained in a previous post.
Chasing the Yield
As a lender, I have slightly changed my approach to lending over time. Initially, I approached this very risk-averse, or at least as risk-averse as one can be in the peer-to-peer space. This meant focusing on the 1 Month and 1 Year market (which was discontinued by RateSetter in 2018). But I quickly moved on to allocate more to the 3 and 5 Year market as I was getting more comfortable in chasing higher returns.
This journey is visualised above. The numbers shown here are not my actual commitment to RateSetter (I wish!). But rather the nature of lending with monthly repayments means there is a lot of churn. The 1 Month market is therefore always looking a lot more bloated than the rest, as loans recycle quicker.
Nevertheless, the massive spike in the last few weeks is a result of the 1 Month rate skyrocketing in recent weeks and me chasing the yield….somewhat successfully I might add as my average interest rate for new loans increased to almost 8%, in line with rates I only received consistently in the 3 and 5 Year market before.
Overall, my commitment in the different markets is still very heavy on the 5 Year market though.
With the introduction of the National Clean Energy market, I decided to allocate at least a portion of loans to Renewable Energy. For one, I perceive those loans to be of lower risk, but also it is rewarding to contribute to something that will help Australia in its efforts to becoming less fossil-fuel dependant.
And so despite my recent focus on more green energy and 1 Month loans, the vast majority of interest is still contributed through the 5 Year market.
The Return
Calculating the return on a loan portfolio is not as straightforward as other investments, such as term deposits or shares. In shares, the investor may collect a dividend twice a year and then a capital gain (or loss) when she sells her shares.
In loans, the initial investment (principal) and the interest are returned over time, and the return of interest in comparison to the initial investment will decrease. But, the repaid principal and collected interest are available for the next loan. The investor should look at the return of the whole loan portfolio, rather than individual loans. This will average out the return on potentially hundreds of loans with different interest rates and the fact that in RateSetter returned funds will take a few days to clear. Funds may also take a few days to be matched to new loans and will sit on the market for a while, not earning any interest and diminishing the overall return.
What I find helpful is to look at the account balance at the end of the month or quarter, i.e. the amount of money in the account plus those on loans, and calculate the return for that month or quarter on an annualized basis, taking compounding into consideration.
As would be expected, monthly returns differ greatly from month to month, while quarterly returns show a more nuanced picture.
The most accurate way is to take a rolling 12-month approach. This shows consistent return in 8%+ range over 2018 and 19 with a dip below that. In total there is a decreasing trend, very much in line with the downtrend in interest rates across all lending markets.
Summary
My 56 months journey with RateSetter is all about chasing high returns, while doing some good by sacrificing returns for Green Energy loans. As a lender with a very long term view, the current volatility in the market represents an “unprecedented” opportunity to achieve very high rates in a short term market. But the impact this will have on the overall portfolio remains to be seen.
If you think this is interesting and you want to learn more about how to visualise your own RateSetter portfolio, check out Peer Lender Insights.
