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RateSetter slashes interest payouts as P2P lenders rush for cover

RateSetter slashes interest payouts as P2P lenders rush for cover

The UK's biggest P2P lender RateSetter has slashed the interest rate paid to investors by 50% as it prepares for a wave of defaults under Covid-19.

The alternative lender says six percent of borrowers have requested a payment freeze and, as a result, it was increasing its projected loan losses from £27.5m to £39.2m.

RateSetter says it is diverting the saving from cutting interest rates to prop up its 'Provision Fund', which provides a financial safety net for investors in the face of a default.

The Fund is intended to protect all investors equally against credit losses and ensure a return based on the performance of the whole loan portfolio. The key metric for the Provision Fund is the Interest Coverage Ratio, with a Ratio above 100% meaning everyone’s future interest and capital is covered.

"The Ratio at the beginning of March was 113%," explains RateSetter. !Following this month’s update, it is 74%. This means that while everyone’s capital remains fully protected, not all future interest is."

RateSetter is unusual among P2P lenders in operating such a fund to cover losses.

Other lenders in the sector have also taken action top shore up their business. Lending Works has slashed all rates to zero and banned withdrawals for a 90-day period that ends in July. Funding Circle, meanwhile, continues to pay interest, but has stopped all cash withdrawals by investors.

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