RateSetter numbers compelling

Borrowers could be as much as seven percentage points better off taking a loan with new peer-to-peer lender RateSetter, compared with the rates offered by the Big Four, according to comparison website Mozo.

Mozo has posted indicative rates for RateSetter, a UK P2P lender that opened for business in Australia last week. Mozo estimated that a borrower with a premium credit rating taking out a A$20,000 loan on a three-year term would be offered a rate of 8.4 per cent. Fees would take the comparison rate up to 10.05 per cent.

According to Mozo, the average rate from the big banks for a similar loan is 13.8 per cent, with a comparison rate of 17.1 per cent.

RateSetter Australia chief executive Daniel Foggo said the company was targeting borrowers with strong credit ratings and would not be lending to applicants with poor credit histories.

Foggo said: "We are not a payday lender. We aim to create a safe product for investors."

"In the UK, where our credit track record goes back to 2010, the default rate is 0.5 per cent."

According to Mozo, a lender funding a loan with the terms set out above would make a return of 7.6 per cent a year.

A distinctive feature of the RateSetter offer is that it has a "provision fund" which can be used to compensate lenders in the event of a late payment or default.

The provision fund is funded by borrower's fees and is controlled by an independent trustee.

Foggo said the provision fund covered defaults as long as it had sufficient funds. "In the UK the fund has stepped in where required, so that every lender has got back every penny of principal and interest."

Foggo cautioned that the rate of return for investors (lenders) would come down over time. When RateSetter was launched in the UK investors demanded a premium because the business had no track record.

Returns have come down now that investors can see the company's data. He said the same was likely to occur here.