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Lending with Zopa
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# 1
Regular Fit
Old 29-12-2011, 10:53 PM
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Default Lending with Zopa

I found some threads on this site from several years back indicating that Zopa didn't offer a great deal for lenders. This seemed to be primarily because the rate of return through conventional saving/investment channels was better. However, now that returns from conventional savings have dropped off significantly, has anyone revisited Zopa as a lender in more recent times? Is the picture more favourable?
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# 2
Pagan98
Old 31-12-2011, 12:35 PM
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I had a look at Zopa recently and concluded that the return was unfavourable once you factor in the lender charge, bad debt provision, no interest on funds waiting to be lent out and inability to write off bad debts against tax.

For example, on the A* market in September/October 2011, the median return after lender charge and anticipated bad debt was 4.90% gross. I reran the calculation the other day and the rates had slid further (sorry, can't find the spreadsheet). Many long term lenders are bemoaning the poor return.

Ratesetter seems to be tipped as a more attractive alternative, partly due to its provision fund to hopefully cover bad debt.
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# 3
jcb208
Old 31-12-2011, 1:35 PM
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I lend a small amount with zopa and as said returns are not that good now ,also I have 2 bad debts and 1 on arragement thats paying 1p a month,also several late payers ,Apart from that I'm just averaging 5% but cant see it getting better in the next year
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# 4
bobbyj
Old 31-12-2011, 6:35 PM
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the bad debts are low thus far because many of these sites haven't been around long enough for a borrower to even complete the full term. Look at the rates people are lending at ffs! They must think it is the season of benevolence! It will all end in tears for many.
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# 5
Derivative
Old 31-12-2011, 8:02 PM
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I don't really see such sites as a good investment decision really.
You can get yourself a guaranteed 4.7% return on 5 years fixed at Yorkshire Bank.
Said Aristippus, “If you would learn to be subservient to the king you would not have to live on lentils.”
Said Diogenes, “Learn to live on lentils and you will not have to be subservient to the king.”
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# 6
jamesd
Old 01-01-2012, 3:04 AM
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Rates at Zopa continue to be too low to be worthwhile. Remember, it's not a savings account, it's an investment where capital is at risk, so it should be compared to other such investments. Easy to find those paying more than Zopa does in funds that can be held in an ISA, look at the yield column for effective interest rate. But also check the capital value performance - it's not all about interest rates, have to watch capital gains or losses as well.

Even if you stick to savings to compare it to, you can get 8% for a year on up to £300 a month from First Direct in their regular saver account. If you don't pay in £300 in one month you can catch up later. Almost completely risk free, with FSCS protection. No point in even starting to think of Zopa until you're using that.

Quote:
Originally Posted by bobbyj View Post
the bad debts are low thus far because many of these sites haven't been around long enough for a borrower to even complete the full term.
That's not really the cause for Zopa, which for 2008 lending saw bad debt rates around twice the predicted overall rate. They now report that year against current bad debt allowance rates, not the ones used at the time people were lending, so their reports look better than it really is. Still looks bad. It's usually done better than that.

For all of the peer to peer lending systems a significant factor is the rate of growth. If you double your lending in a year you effectively halve your overall default rate, if few default in the first year, just because of the extra money lent. There are always some defaults in the first year but that's still a factor that reduces the apparent default rate significantly.

If you want to see how a peer to peer lender's underwriting is doing, insist on seeing bad debt for each period compared to the bad debt allowances given at the time the lending was done. That way later massaging of the figures won't make it look better than it really was presented to lenders at the time they decided to lend.

Last edited by jamesd; 01-01-2012 at 3:14 AM.
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# 7
atush
Old 01-01-2012, 10:45 AM
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I looked into ti, but found the reward wasn't worth the risk. I think a good blue chip, bought after recent falls, paying a good Divi is a better bet for me.
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# 8
00ec25
Old 01-01-2012, 11:20 AM
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I have been a Zopa lender since 2009. It no longer offers a rate of return which is significnatly better than elsewhere given the level of risk you are exposed to and so as each repayment comes in each montyh I now withdraw it and pay it into the First direct account mentioned above as this is 8% and very low risk.
Zopa now compares very badly - if you are a high rate tax payer and experience the statistical average bad dabt rate then there are some Zopa markets with interest rates of 8 - 9 % which in reality after bad debt and tax give you a negative return
Many new lenders fall into the trap of thinking of Zopa as a savings account - it is not - it is an investment where your capital is at risk and IMHO the current rates of return do not provide enough margin to make that extra risk attractive at present
Also bear in mind that it can take some time to get money lent, until it is lent you earn nothing and over the course of a year this can lower your overall rate of return quite noticeably - hence a lot of new lenders are effectively chasing rates down just to get money lent out.
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# 9
pqrdef
Old 01-01-2012, 11:49 AM
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Statistical bad debt rates only become usefully indicative if you make a rather large number of loans, and even then, they're still subject to future economic conditions.

Most lenders should probably regard Zopa as analogous to Premium Bonds, where the return you get is just pot luck, at least until you put in £10K+. Except that with Zopa the upside is strictly limited, the returns are taxable, and you don't get guaranteed repayment of capital.

RateSetter is worth a look though.
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# 10
bobbyj
Old 01-01-2012, 12:32 PM
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I think fundingcircle is more the danger as it's lending to business and it's my belief many of these businesses have of course been told a big fat 'NO MONEY' from the bank.
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# 11
DireEmblem
Old 01-01-2012, 2:14 PM
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The only downside to investing in funds as suggested above is the ISC, and having to take time to carefully pick your choice - past performance is not a great indicator for the future.
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# 12
jamesd
Old 01-01-2012, 6:19 PM
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DireEmblem, those are one of the alternative options. Another is directly held retail corporate bonds, some of which are offering rates above 8%. Click on the GRY column twice to sort by gross redemption yield highest to lowest. Or on Current Yield to do the same for running yield. Gross redemption yield includes the effect of capital return at the end of the bond's term, current yield doesn't. Some examples:

Enterprise Inns 2018: 9.319%, 13.323% (end date, running, redemption yields)
Co-op bank 2099: 8.548%, 8.550%
RSA Insurance 2099: 8.543%, 8.543%
Aviva 2036: 7.695%, 8.044%
Legal & General 2099: 7.209%, 7.212%

All of those are eligible to be held in a S&S ISA so the income can be tax free and there's no doubt at all that they are more credit-worthy than peer to peer consumer borrowers.

Moving on from them the next option might be PIBS from building societies and former building societies.

If you want running yields over 10% you can get those from Lloyds TSB (LBG Capital or Lloyds TSB Bank). Not really likely that the UK government will let it default, but it's possible.

For all of those you'd want to spread the money around to diversify in case one or more of the companies does end up unable to repay. Enterprise Inns is significantly more risky than some of the others, for example.
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# 13
00ec25
Old 01-01-2012, 6:41 PM
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Quote:
Originally Posted by pqrdef View Post
Statistical bad debt rates only become usefully indicative if you make a rather large number of loans, and even then, they're still subject to future economic conditions..
agreed - however you have to base the investment decision on some sort of info and this is all you've got to go on
personally I have (at the moment) had well below the statistical average

Quote:
Originally Posted by pqrdef View Post
Most lenders should probably regard Zopa as analogous to Premium Bonds, where the return you get is just pot luck, at least until you put in £10K+.
that is a bit too far - ZOPA is no where near as random as the pure chance that is represented by PB, after all with ZIOPA no one will experiecne 100% bad debt so you will always get some sort of return, with PB it's either win or lose - however it is all too true that no two people on Zopa will achieve the same rate of return as each person will have a unique bad debt experience.

Last edited by 00ec25; 01-01-2012 at 6:43 PM.
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# 14
celtic123
Old 01-01-2012, 7:14 PM
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better off with corporate bonds mate
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# 15
Kitte
Old 01-01-2012, 7:39 PM
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I opened a Zopa account just under two years ago and put on a smallish amount of money to 'test the water' for a year or so. I promptly forgot about it and only remembered to check today!

I only lent to A*/A markets.

The rate I have achieved to date is 6.63% before tax. This includes all fees, bad debt (I've not had any) etc.

I think ultimately it probably is worth putting your money elsewhere, given the level of risk, but that said it is far more fun than bunging the money in a savings account.

I don't see Zopa as an alternative location for my hard earned savings, I do see it as a bit of a fun way to 'invest' a reasonably small amount of money and then treat it as a game. It is more 'human' than putting money in a bank and I like to see who and why I am lending the money. Most of my loans are for people 'oop north' buying cars!

My intention is to start putting £50/month or so onto it and then if that goes well scale it up to £100/month but I can't see myself putting any more than that at all.
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# 16
Totton
Old 02-01-2012, 1:47 AM
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Quote:
Originally Posted by Kitte View Post
I think ultimately it probably is worth putting your money elsewhere, given the level of risk, but that said it is far more fun than bunging the money in a savings account.
Not knocking it but am intrigued to know what the 'fun' part was if you had forgot about the money and haven't remembered about it for a year or so?

Regards,
Mickey
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# 17
jamesd
Old 02-01-2012, 3:12 AM
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Quote:
Originally Posted by Kitte View Post
Most of my loans are for people 'oop north' buying cars!
Who say they are using it for buying cars. Sadly it isn't necessarily true. Even those saying debt consolidation aren't necessarily telling the truth - some just borrow for that reason, spend the money to service existing debts and/or for other spending, then default a few months later. OK to look at the reasons given but don't necessarily believe them...

It can be entertaining to try to optimise returns but at the moment there are steep cliffs where you either lend at a low rate or don't get included in loans at all, so there's very limited scope for that sort of thing.

One of the less appealing things is that with the routine early repayments of loans Zopa quite often ends up getting more than half of all of the costs of a loan that a borrower pays. Depends on specific amounts of loan, the Zopa fee incurred and how early the loan is repaid. It's particularly ironic given the claim to be cutting out the middle men that the half of the money is sometimes going to the middle men. At least the reduced Zopa fees for some loan sizes make this less likely sometimes, so that's a welcome improvement.

Quote:
Originally Posted by Kitte View Post
My intention is to start putting £50/month or so onto it and then if that goes well scale it up to £100/month but I can't see myself putting any more than that at all.
Just be sure you use the FD 8% first.

If you want to learn a more useful life skill and aren't yet an experienced investor, go with the S&S ISA investing instead. That'll help you to learn more about investing in general and help with things like growing a nice pension pot as well.

Last edited by jamesd; 02-01-2012 at 6:50 AM.
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# 18
property.advert
Old 02-01-2012, 4:22 AM
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I looked at this and a few others and caste them aside. Like others have mentioned, clowns lending money to chancers at ludicrously low rates made it impossible to achieve a favourable risk weighted return.

Its like you have granny on there lending out the pension she does not need because she is loaded at 6% or some other such nonsense.
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# 19
Kitte
Old 02-01-2012, 11:14 PM
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Quote:
Originally Posted by jamesd View Post
Who say they are using it for buying cars. Sadly it isn't necessarily true. Even those saying debt consolidation aren't necessarily telling the truth - some just borrow for that reason, spend the money to service existing debts and/or for other spending, then default a few months later. OK to look at the reasons given but don't necessarily believe them...

It can be entertaining to try to optimise returns but at the moment there are steep cliffs where you either lend at a low rate or don't get included in loans at all, so there's very limited scope for that sort of thing.

One of the less appealing things is that with the routine early repayments of loans Zopa quite often ends up getting more than half of all of the costs of a loan that a borrower pays. Depends on specific amounts of loan, the Zopa fee incurred and how early the loan is repaid. It's particularly ironic given the claim to be cutting out the middle men that the half of the money is sometimes going to the middle men. At least the reduced Zopa fees for some loan sizes make this less likely sometimes, so that's a welcome improvement.

Just be sure you use the FD 8% first.

If you want to learn a more useful life skill and aren't yet an experienced investor, go with the S&S ISA investing instead. That'll help you to learn more about investing in general and help with things like growing a nice pension pot as well.
Jamesd, you're absolutely right of course. My main point was that if anything, Zopa should be a bit of fun - something that you can put a very small amount into, have a bit of a play with - but something that doesn't require an immense amount of fiddling with once it's set up. I'd never use it as a genuine investment vehicle or even part of, more of a (nerdy) game as I like playing with figures and statistics (I'm a financial analyst by trade).

Curious about the FD 8%? I presume you mean First Direct's 8% RS accounts? If so, I have two of these already saving the maximum £300pm each and have maxxed out my (cash) ISA allowances.

S&S Investment is something on my list to investigate for 2012 as it happens! I've got a practice account that I'm playing with now, but I've never invested any money in shares before!
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# 20
Kitte
Old 02-01-2012, 11:18 PM
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Quote:
Originally Posted by Totton View Post
Not knocking it but am intrigued to know what the 'fun' part was if you had forgot about the money and haven't remembered about it for a year or so?

Regards,
Mickey
I probably class 'fun' as something different to most people. I enjoyed building a fairly complex spreadsheet to take into account all the variables before deciding to put some money on it. Once I did, I monitored it for about a month or so, then life got in the way
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