Our July blog also expressed our intention to offer a consumer HP product and we are now in a positon to provide more information about that. Today we have launched HP for consumer vehicle purchases. The first three months will be a pilot period to test the product.
We believe that commercial and consumer HP products will broaden our addressable market and enhance RateSetter’s offering to borrowers, while providing a new channel to deliver steady returns to lenders.
How will RateSetter HP consumer agreements work?
HP is a regulated, secured credit agreement where a borrower has use of an asset while paying for it through regular instalments. RateSetter consumer HP will be available to people purchasing a vehicle. The assets – vehicles – will be legally held by RateSetter on behalf of lenders: the customer may return the vehicle and end the agreement or take legal ownership of the vehicle when the final payment (including a nominal option-to-purchase fee) is made.
What is the credit criteria for RateSetter consumer HP?
This will be in line with the criteria currently set out on our website here.
What will be the typical value of the HP agreements and APRs for customers?
HP agreements will be up to £25,000, but we expect them to typically be around £6,000. The agreement term will be between 12 and 60 months, and we will allow early repayments without penalty. APRs will depend on our assessment of each customer’s creditworthiness, starting at 19.9% and with the same maximum APR as our existing consumer finance of 49.9%.
How will customers be originated?
Initially all customers will be originated through intermediaries (FCA regulated car dealers), but we intend to allow direct applications in due course.
Does this change the risk of investing with RateSetter? What is the expected level of defaults, and what happens if a customer defaults?
This does not materially change the risk of investing with RateSetter. We expect the level of defaults will be higher than the current consumer loan book, but the nature of the security for HP agreements means enhanced recoveries which will protect lenders’ position.
Customers approved for HP agreements will pay into the Provision Fund in accordance with our assessment of their creditworthiness at the point of approval and we take full security over the vehicle. If a customer defaults, the Provision Fund will act in the usual way, by providing a buffer for lenders and then making recoveries using the vehicle as security (vehicles are fitted with tracking technology and an immobiliser to facilitate repossession if the borrower defaults).
The Provision Fund has the effect of spreading the exposure of every lender across all our loans. This means that the risk taken on by each individual RateSetter lender is effectively diversified across the hundreds of thousands of RateSetter borrowers, which is one of the strengths of the Provision Fund model. Lenders should note that the Provision Fund does not guarantee safety.