What do our new direct lending partnerships mean for investors?

We recently announced that we have ended our wholesale lending arrangements and introduced direct lending partnerships instead, a move that brings us closer to end borrowers. We’d like to explain in more detail what this means for RateSetter investors.

What is wholesale lending and what’s changed?

Wholesale lending involved RateSetter providing funding to other lenders, who would then lend the funds on to their own borrowers. This accounted for around 14% of RateSetter’s active lending.

Earlier this month, we announced a change to our relationships with the lending businesses, so that RateSetter now lends directly to the end borrowers. The lending businesses are guarantor personal loan provider George Banco and motor finance specialists Vehicle Credit Limited and Vehicle Stocking Limited. As a result, these wholesale lending arrangements have come to an end.

We still have outstanding finance of £32m in total with George Banco and £38m in total with Vehicle Stocking Limited and Vehicle Credit Limited. These loans will continue to be repaid by the businesses in accordance with the schedule of the existing loan contracts.

Who borrows through the direct lending partnerships?

These borrowers generally have a higher credit risk than our existing direct borrowers. To manage this risk, they will pay an appropriately higher amount into the Provision Fund. Additional measures to manage the credit risk are that vehicle loans are secured against the car which has a tracker and immobiliser fitted, and guarantor loans have a third party (usually a member of the borrower’s family) who is legally responsible for paying off the debt if the borrower does not do so.

We’ve updated our Principles of Lending document, which shows who RateSetter lends money to and what our criteria are – you can view it here.

Why make this change?

In late 2016, we took the decision to wind down wholesale lending (more detail can be found in our blog).

This brings a number of advantages. Most importantly, it brings our loan underwriters into direct contact with these end borrowers, meaning that we assess each application directly, processing loans on an individual level and remaining in direct contact with the borrower.

It also removes the risk of lending large amounts of money to any single borrower. Although we closely monitored the wholesale platforms, there was some risk that one could get into financial difficulties of its own, or may lend to borrowers that do not meet our strict criteria. Our new arrangements give us more control to directly manage risk for RateSetter investors.

Additionally, lending money to lots of smaller borrowers spreads investors’ exposure and this diversification is also an important part of risk management: in general, it can be considered to be advantageous to spread risk across thousands of smaller borrowers rather than a handful of larger borrowers.