This is an alternative investment, and like all investments, there is risk involved. While the loan business has been around for a long time, there is always risk of borrower defaults. One thing to note is that you do not get to choose who you loan your money out to. Instead, Ratesetter screens all borrowers for creditworthiness matches them to the investors.
As an added contingency, there is a provision fund which is used to help protect investors to a small degree if borrowers default. If there is a significant increase in borrower defaults, then the provision fund may not be able to cover your losses and you can lose some or all of your invested money.