Peer to peer lender RateSetter launched in Australia in 2014. It has facilitated more than half a billion dollars worth of loans and successfully managed borrower’s default on behalf of its investors. But being faced with a broader economic downturn for the first time since its existence, can it maintain its perfect record for much longer?
In this post, I am exploring if there are early signs of COVID-19 and the current economic climate impacting RateSetter loans and loan repayments. Credit to their strong commitment to open data, RateSetter regularly publish their loan book and this has been the basis of this analysis.
Before we get started, let’s get one thing out of the way. 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…naturally, I would like them to do well and continue to do so, despite the impact COVID-19 has on Australia’s economy.
Isn’t it too early to tell anything?
Australia began taking steps against the spread of COVID-19 in early March. While the impact on the economy was immediate and is likely to continue to worsen, you need a crystal ball to predict how rising unemployment will trickle through the economy and affect consumer loans and the housing market.
While the impact on loan repayments may not be evident in this short of a time frame, there are signs of a direct impact on RateSetter’s market. The volume of loans collapsed by almost half towards the end of March, causing wild fluctuations in rates in the 1-month (anywhere from 2.2% to 9%+) and 3-year market (effectively doubling from ca. 4% to 8%).
This type of volatility is concerning to both borrowers and lenders and quickly prompted RateSetter to cap the maximum interest rate at 9% on March 23.
[RateSetter Newsletter]:
Amendments to the maximum lending order rates: Swings in lending market rates make it more difficult for investors and borrowers to make clear decisions about whether to use RateSetter. To help reduce rate volatility, we are setting the maximum lending order rates across each market to 9.0%. Any existing orders (including reinvestment orders) higher than the maximum order rate will be cancelled and funds returned to your holding account.
The collapse in volume did not come as a surprise to RateSetter either. An email as early as Friday 4 March encouraged investors to commit additional funds into their accounts to prevent volumes from plummeting.
[RateSetter Newsletter]:
Invest by 31 March 2020 and you will earn:
- $50 bonus if you invest between $5,000 and $9,999.99
- $100 bonus if you invest between $10,000 and $19,999.99
- $200 bonus if you invest between $20,000 and $49,999.99
- $500 bonus if you invest $50,000 or more
Nothing wrong with that, it is in everyone’s interest that both demand and supply are healthy. The overall amount of loans distributed dropped nevertheless to somewhere near the $17 million mark throughout March.
The sudden change in economic conditions had a measurable impact on RateSetter’s market. Let’s take a closer look at the loan book performance to see if there had been a similar result.
How have loans been impacted?
Disclaimer: All of the below data is taken from RateSetter’s most recent loan book update on 31 March 2020.
See our interactive Dashboard here.
As of the end of March, RateSetter facilitated a total of $660 million loans with close to $300 million of those outstanding.
These loans are distributed across Australia, with NSW and QLD making up more than half of all outstanding loans (click here for the interactive map).
These loans have traditionally been mostly brokered for Debt Consolidation, with Home improvements, Professional Services and Car/Vehicle a distant second, third and fourth.
So far so good, loans are distributed across the country for different purposes, that is what peer to peer lending is all about.
Taking a closer look at recent trends, we may be able to obtain a better idea about the impact of economic restrictions due to COVID-19.
Above we are comparing three different moments in time. Now (as of publication of this post), three months ago and a year ago.
On first view, it appears there may be a slight movement from loans On Schedule to Repaid, but also those In Default. This is to be expected, while loans can move from On Schedule to Hardship (or 30 days late) and back again, once a loan is either In Default or Repaid, that’s it, they are done and dusted. An increase In Default is therefore not necessarily a bad sign, although it can be.
To unpack this further, let’s remove In Default and Repaid loans and we get a different picture.
Of all outstanding loans, close to 94% are on schedule, which is in line with RateSetter’s expectations. The remaining 6% are moving between being late to being in Hardship, although the Hardship number is lower now than it was at the end of 2019.
The amount of borrowers who are late on their payments by more than 30 days has increased since the beginning of the year by 16 basis points. This is roughly an increase of $475.000 of all outstanding loans.
Cause for concern? Difficult to say, but probably not. RateSetter’s Provision Fund is quoted at about $17 million, easily covering those potential losses.
So far early signs are still promising. The data does not show any overly concerning trend concerning borrowers ability to repay yet, but we have only been a few weeks into this health crisis which will is already turning into an economic one.
Let’s look at the trends of how money has been borrowed lately.
Debt Consolidation has always been an important loan purpose. While during 2017 and 2018 this diminished a bit — bottoming out at about 17% of all new loans in Q3 2017 — it increased in proportion again and was responsible for every fourth loan in RateSetter in Q1 2020.
At the same time, the proportion of Car loans has continued to lose significance and is now less than 10% of all new loans.
Not surprisingly, given RateSetter’s general push into this direction, Renewable Energy loans now contribute more than 25% of all loans. These loans are very much long terms investments with the purpose of a payout for the borrower as well as the lender. Importantly, solar panels installations are still considered essential in Australia and overseas and do not seem to be restricted yet.
Renewable Energy and Solar Battery had their highest value month ever in March and with the drop in volume in the other categories made up the majority of loans for the first time.
Now what? Is there reason for concern?
What have we found for RateSetter Loans specifically:
- Volume has dropped. It seems investors have pulled some of their cash out or parked in the holding account for the time being. This is evident in the increase in loan rates and RateSetter’s attempts to encourage more fund transfers into the market.
- It is too early to tell how the economic downturn is going to impact borrower’s repayments of peer to peer loans in the medium term, so far there is little evidence of any impact. The long term ability for borrowers to repay their loan will depend on the overall economy bouncing back after current restrictions have been lifted.
- Loans in March have continued to grow strong in the Renewables sector, while dipping in other key sectors such as Debt Consolidation. This may be due to investors moving their money into the long-term focused National Clean Energy and SA Renewable Energy market.
Verdict.
A dip in volume due to a decrease in supply (the lenders) is a problem for the other two parties in peer to peer lending, the borrowers and RateSetter. For borrowers, it means an increase in rates, for RateSetter a less competitive market and fewer fees with less volume.
In this analysis, we are looking at it from an investor point of view, however, and the volume is not overly of concern. On the contrary, it may be encouraging to keep investing since higher rates are on offer.
Borrower’s repayments have not been impacted greatly yet, but of course may change suddenly and could be of concern then. The data so far does not suggest a change yet and this remains to be seen.
The growing significance of Renewable Energy loans is promising. Leaving the environmental benefits aside, an increase in loan value in this sector suggests a long term horizon of the borrower and, arguably, a more stable and responsible borrower mindset. And as Simon Cordell from RateSetter has pointed out:
…these lending categories [have] demonstrated resilience across credit cycles (traditionally, this lending demonstrates more stable returns than credit card lending and business lending).
RateSetter publish their loan book only every three months. A more frequent publication would allow us to run a similar analysis next month. Until then we need some patience for the loan book to be published at the end of June….and a lot can change until then.
