Zopa. Neither a borrower nor a lender be!

MarkyMarkD wrote:

OK taking those in turn:

(1) If a ZOPA lender charges 10% APR to someone who would otherwise be paying 20% APR, that ZOPA lender is on average going to lose a lot of money. Fact.

(2) "Over half the banks' costs are bad debts"? Rubbish. The majority of bank costs, like any service business, is STAFF. Bad debt costs are tiny at this point in the economic cycle.

(3) Credit unions are all economically unsound, because they are lending at unsustainably low rates and only "making money" through subsidies. The banks are not "ripping off" these customers - they are charging a rate which reflects the risk of default - which is very high.

OK Taking those in turn.....

(1) If someone is paying an APR of 20% on a credit card it doesn't necessarily mean that their level of risk justifies a 20% APR. Using me as a hypothetical medium risk (B) example, I could transfer a credit card balance at 19.9% APR to a bank loan or overdraft at say 12% or maybe a zopa loan for 10%. So I could halve my card borrowing rate using zopa. My card rate is high because I'm paying a risk premium and subsidising all the full paying customers and zero % deals as well as bank profits and I can't get the zero% deals of market leading loan rates anywhere else because i'm 'medium risk'. Fact

(2) Personal bankrupcies are at record levels and if you look at the recent results of banks with big personal customer books such as HBOS or Barclays you will see 100's of millions of pounds of write offs on personal lending and credit cards. Corporate bad debt is at record lows yes but not personal debts. Not rubbish

(3) Agreed - credit unions are subsidised. And bad credit risk people should pay more for debt if there is genuine risk. However, I believe there are areas where both low risk and high risk customers are paying too much for debt. eg. Store credit at 30% for low risk customers, 60% apr on a high risk credit card, 100%+ rates for doorstep lending. Humans and bank shareholders are naturally risk averse and not all lenders or products out there use 'risk based pricing' Therefore some customers who are low risk will end up subsidising those who are higher risk.

It may be idealistic but I'd like to believe that just because you are on a low income you are not necessarily a bad credit risk or that you should be denied access to basic banking services and small amounts of debt. Why should someone with no debt earning £7000 per year not be able to borrow £300 for under 10% APR? Agreed, if they want to borrow £5000 that is too much debt and they should either be discouraged through big APRs or the banks shouldn't be allowed to lend irresponsible amounts to those who cannot afford it.

R.

I came across Zopa having followed a link from the BBC website. Looks interesting, I thought, seems too good to be true... probably is?

As a potential lender, I couldn't help but feel Gordon Brown wouldn't be too far away. There was a conspicuous lack of information on tax. So I sent them an email, and got this reply:

Thank you for your email concerning tax implications on lending at Zopa, I hope this answers all your questions.

We will send all Zopa lenders an annual tax statement showing the total gross interest they have received over the previous 12 months. Please note that all returns are paid without any tax - even basic rate - deducted. All Zopa lenders should declare their gains to the revenue.

If you have any further problems please do not hesitate to contact us at contactus@zopa.com.

Once again, thank you for your support and for wanting to be in at the beginning of something we hope will change consumer financial services for everyone, for ever.

Zopa Member Services Team
Zopa Limited

Let's say I'll be sticking with the boring option of overpaying on our mortgage.

Rafter wrote:

OK Taking those in turn.....

(1) If someone is paying an APR of 20% on a credit card it doesn't necessarily mean that their level of risk justifies a 20% APR. Using me as a hypothetical medium risk (B) example, I could transfer a credit card balance at 19.9% APR to a bank loan or overdraft at say 12% or maybe a zopa loan for 10%. So I could halve my card borrowing rate using zopa. My card rate is high because I'm paying a risk premium and subsidising all the full paying customers and zero % deals as well as bank profits and I can't get the zero% deals of market leading loan rates anywhere else because i'm 'medium risk'. Fact

(2) Personal bankrupcies are at record levels and if you look at the recent results of banks with big personal customer books such as HBOS or Barclays you will see 100's of millions of pounds of write offs on personal lending and credit cards. Corporate bad debt is at record lows yes but not personal debts. Not rubbish

(3) Agreed - credit unions are subsidised. And bad credit risk people should pay more for debt if there is genuine risk. However, I believe there are areas where both low risk and high risk customers are paying too much for debt. eg. Store credit at 30% for low risk customers, 60% apr on a high risk credit card, 100%+ rates for doorstep lending. Humans and bank shareholders are naturally risk averse and not all lenders or products out there use 'risk based pricing' Therefore some customers who are low risk will end up subsidising those who are higher risk.

It may be idealistic but I'd like to believe that just because you are on a low income you are not necessarily a bad credit risk or that you should be denied access to basic banking services and small amounts of debt. Why should someone with no debt earning £7000 per year not be able to borrow £300 for under 10% APR? Agreed, if they want to borrow £5000 that is too much debt and they should either be discouraged through big APRs or the banks shouldn't be allowed to lend irresponsible amounts to those who cannot afford it.

R.

(1) If you're saying that they are not paying the "best buy" rate they could be paying, then switch to the "best buy" they are eligible for. If an individual person is correctly charging for the risk they face in lending to a "medium risk" individual through ZOPA, they won't be charging 10% (which isn't even 10% because ZOPA take 1% up-front). You can get around 5.5% risk free in a savings account, or around 9.5% (if it's a 2 year loan) through ZOPA. You think that it's worth taking a medium amount of risk for a 4% increase in return, and far less flexibility than a savings account? Honestly, I don't think so.

If a "medium risk" customer is 5% likely to default (that's only 1 in 20 customers), the return on the loan is (9.5% x 2 years) - 5% = 14% = 7% per annum. Worth the risk? I don't think so.

(2) You've completely ignored what I said about your original error. "Over half the banks' costs are bad debts" is what you said. You now refer to Barclays and HBOS.

Barclays' latest results? Operating expenses £8.5bn. Bad debts £1.1bn.
HBOS' latest results? Operating expenses £2.1bn. Bad debts £0.7bn.

A half? Er ... no.

And what does that prove anyway - that the banks are right to charge higher rates to riskier customers as there are expected to be defaults. Hence why ZOPA lenders won't make money.

(3) ZOPA are credit scoring in exactly the same way as other lenders. I don't see how just because the loans are being made by individuals, rather than a bank, this will lead to more effective risk categorisation of borrowers - which is what you are talking about. Banks risk categorise because it's their business to get it right. Some charge too much to some borrowers - but then suppliers of all services over-charge, if their customers fail to shop around for the best deal. I don't accept that over the market as a whole, borrowers are over-paying for their loans.

And make your mind up - in (2) you're claiming personal bad debt is a really big deal, but in (3) you're claiming that the banks are overcharging for higher risk customers. Consistency?


I stick by what I said - it's a bad idea. The lenders won't make money. They'll only go for it if they don't understand the risk they are taking on, and the relatively poor returns they are getting in exchange for that risk.

I don't doubt that borrowers will sign up - who wouldn't, if you can borrow at sub-market (sub-economic) rates.

MarkyMark,

I'll agree to disagree.

If the market was as efficient as you suggest, then there would be no demand for sites like this. Nor would there be several competition commission enquiries underway. Nor would the banks be making such high profits.

You are suggesting that individuals shouldn't take the risk that banks take which I quite agree with, without evidence that Zopas credit risk management is sound. A bank has massive regulatory obligations to the Bank of England and other bodies. I'm not sure Zopa will be as tightly regulated or as careful with other peoples money.

I go back to my original point to Martin though. Banks cannot sustain a 5.5% risk free rate on savings and a 5.7% best buy rate on personal loans (or even less on 0% cards). A 0.2% margin isn't enough to cover operating costs and bad debt risk.

However some customers are getting 0.1% rate on their savings or bank balance and are paying 15%+ on their credit card or 10%+ on a small personal loan.

If Zopa can encourage the gap between savings and borrowing rates to reduce that has to be a good thing, doesn't it? It means everyone is getting better value out of the banking system, rather than the few who are smart enough to play the introductory offers and use sites like this.

R.