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.