A British peer-to-peer lender has become the first platform to sell non-performing debt.
RateSetter has completed a deal with undisclosed terms to 1st Credit, a debt purchasing company.
The companies revealed this is the first time a UK P2P lending platform has sold debt.
The lender says the loans were taken out between 2010 and 2015 and that the company felt borrowers were unlikely to settle the debt.
In most cases, RateSetter could not contact the borrower or the borrower’s financial circumstances were such that they could not repay the money.
The platform has a provision fund designed to keep paying investors if borrowers are late with payments or default.
£18.8m compensation for non-performing loans
Operations manager Ryan Marais said: “We undertook this debt sale to secure some value for the provision fund from loans where we’d exhausted the other options available to us.
“We always strive to ensure that RateSetter borrowers are treated fairly and that is why we specifically chose to partner with 1st Credit as they are a progressive and responsible debt purchaser.”
RateSetter has a £22.23 million provision fund to cover bad debts and expects to pay out £18.78 million compensation to investors.
The platform has paired almost 48,000 investors with borrowers for loans of £1.61 billion.
Borrowers pay interest at rates between 2.7% and 4.1%.
20 P2P lending platforms gone offline
RateSetter says: “If a borrower defaults, the provision fund takes ownership of the loan and begins a recovery process, making every reasonable effort to restart payments. The fund has ensured that no individual RateSetter lender has ever lost a penny, although this is not a guarantee for the future.”
Critics have voiced concerns about default rates in the P2P lending sector amid questions of if underwriting covers the risk with some platforms.
They have concerns that investors could lose their money if a platform goes bust.
The loans are not regulated and do not have any protection from the Financial Services Compensation Service.
Around 70 P2P lending platforms are available to investors and borrowers in the UK, while around 20 have gone offline or stopped lending in the past two years.
Default rates for bad debts are quoted at between 2% and 5% by many platforms.