Our blog on 3 January 2019 outlined plans for the Rolling market to fund two types of loans:
Loans that repay your money, plus interest, in monthly instalments (existing functionality)
Loans that repay your money, plus interest, at the end of the loan term (new functionality)
This update will enable a deeper Rolling market, with improved access for investors and greater certainty of funds for borrowers. We are now providing details of what this will mean in practice for investors, in advance of the update coming into effect on 21 February. Overall, the Rolling market will continue to work in exactly the same way as now. That is, your investments are matched to a borrower for the full term of a loan. When the borrower repays your money, it is reinvested into new loans in the Rolling market.
The only update you will see if you are matched to a loan that repays at the end of the loan term, is a new transaction called Interest Accrued. This is interest that you will accrue monthly until it is repaid, at which point it becomes Interest Received. Both Interest Accrued and Interest Received will appear in your monthly account statements, starting with the February statement which you will receive at the beginning of March.
Below is an illustration of how the changes will appear in the Balance Sheet section of your account:
Which loans pay back interest at the end of the loan term?
This type of loan tends to be secured against an asset such as a house, so a common purpose is property development.
Can I choose which loans I am matched to?
Loan matching happens in the RateSetter exchange based on the chosen rate and time of new orders. There is no option to choose individual loan types.
Are my earnings in the Rolling market affected at all?
Money that is matched to a loan that repays at the end of the term may have a more consistent earning rate because it won’t have instalments that are continually repaid and then reinvested, either at a different rate or with a time lag to get matched again. This means that your loan could remain invested at the same rate for longer.
If I don’t receive regular repayments will I lose the benefit of compounding interest?
No, the Rolling market will work in such a way that Interest Accrued will compound. This will be reflected in the Loan Contract Details and Schedule of Payments.
When does Interest Accrued become Interest Received?
Interest Accrued becomes Interest Received when the borrower repays their loan. It also becomes Interest Received if you use Sell Out, or if a loan defaults and the Provision Fund steps in.
Is there any change to my ability to access my money early?
The Rolling market should increase in size as a result of being able to fund different loan types. As the market grows its liquidity is increased and so your ability to access money early is enhanced.
As now, if you request to Sell Out you will have access to any interest that has accrued up to that date, even before the borrower has repaid.
Will there be any changes to my RateSetter account annual tax statement?
Interest Received is taxable and this will continue to appear on your tax statement. Interest Accrued will not appear on your tax statement.
Will the Provision Fund cover Interest Accrued?
Yes, in the event of a loan default, the Provision Fund will cover Interest Accrued up to that point.
Does this change the risk of my investment with RateSetter?
This does not change the credit risk of investing with RateSetter. There is no change to the types of loans we originate nor to our credit criteria.