Zopa - what are the realistic returns if you lend?

crazihos

Hi folks,

I have around £20k to invest in the mid-long term and was looking at zopa as an option as it looks interesting.

The thing is they dont exactly make it clear for you to work out what the returns might be, the bad debt isnt explained very clearly so its hard to work out what you might ge back.

Does anyone one know what annual apr you should get back if you lend to people in the lower risk brackets after bad debts?

Also is the bad debt % they give over the whole term?

Eg - you lend at 8% per year rates per year but bad debt they show (say 4%) devided over the term you lend - say 36 months giving 1.33% per year bad debt.

So you would make 8% but would need to deduct their 1% lending fee and 1.33% bad debt per year giving a realistic return of 5.67%?

Is this right - its hard to work out?:o

Russ

skid112

have some money in Zopa, this year annualised returns for me running at just over 7%, including bad debts and Zopa fees.

bendix

skid112 wrote: »

have some money in Zopa, this year annualised returns for me running at just over 7%, including bad debts and Zopa fees.

A very risky strategy in my view, particularly as it's safe to assume bad debts and defaults are going to increase substantially as unemployment rises.

I don't even lend to people I know - why on earth would I lend to people I don't know via a website?

Paul_Herring

You're probably best off joining the boards over at Zopa and asking there (aswell,) not all of us bite

I've been lucky wrt bad debt, and I'm getting about 8-9% at the moment.

To be honest, it's not something you can really work out on paper before you actually do it, because once you start you'll find that you'll probably end up changing the rates you're attempting to lend at (usually downwards because your money isn't going out because you were over optimistic about the rates, or it simply isn't moving as fast as 'you'd like.')

00ec25

The figures shown on the Zopa website are based on the averages from a rolling 12 month period, therefore

1st point - "past performance is not necessarily a guide to the future"

2nd point - you set your own interest rates anywhere between the range 0% - 20%. The higher the rate you set the lower the chance you have that you cash will be included in an actual loan taken out by someone

3rd point - say you decide you will only loan out at 8% gross. Zopa take a 1% fee so effective rate is 7%. Now whether you actuially scheive this or not depends entirely on your own personal experience with bad debt.

4th point - your loans are repaid monthly, therefore every month you get both interest and capital returned. So your annualised rate of return needs to account for the fact that in month 1 you had £10 lent out at 7%, but in month 2 you had £10 minus repayments lent out and the amount you had received back could either be withdrawn in cash to your bank account or relent at any rate you choose, ie> or <8% , its your choice

Bad Debt
The key to Zopa lending is to diversify your exposure. All figures quoted are means, therefore to achieve mean returns as shown on the website your total investment must be big enough to exactly mirror the market. This will be nearly impossible as there is >£M on the market, however, statistically, you can come close to the market mean if you have a large number of low value loans, hence Zopa recommends no more than £10 lent to any one individual borrower and you need several hundred loans (ie individual borrowers) to get that sort of reduced exposure.

Therefore:
5th point - Zopa works best if you drip feed money in over a period of time. Currently any money which has not yet been lent out gets 0% interest and it can take a long time (weeks) to get money lent at £10 per time as Zopa (for obvious reasons) are being increasingly careful to vet/credit check the quality of the borrowers, so not many make it through to the point where they are allocated money from the lenders, so your turnover can be fairly low.

Me
I did not understand the drip feed method when I started and began with a £3k lump sum 9 months ago. My average rate of return on this after the 1% fee is 7.6%. All my loans are for 36 months. This week I have had my first ever instance of someone missing a monthly payment. If they become a bad debt I will therefore stand to lose £8.78 as they have paid me £0.78 in capital repayment and £0.44 in interest

therefore my bad debts at the moment could be £8.78/£3,000 or 0.003%. Neither I nor Zopa know if anyone else will struggle to repay in say 6 months time, but by then I will have had 15/36 of my £3,000 capital repaid (£1,250) plus interest (£292) repaid so close to hafl of my original investment. So if anyone then defauts they will only default on the remaining outstanding amount ie no more than half what I invested, so in theory if default were 100% thereafter I would break even.
Defaults will not be 100% but neither I nor Zopa know for sure what the exact rate wil be, for the last 12 months its been 0.5% in the markets I invest in, but as shown above that has not been my personal experience. I have been lucky, others have not!

withnell

I've been lending on Zopa for about a year now, and am currently running at a loss, so it's not all rosy!

Dave2112

Do you have to declare any profit to the tax man and then pay tax on it? So if you were getting 7% return it would actually work out at 5.6% for basic tax rate payer or 4.2% for higher rate.

anselld

Yes you need to declare interest received. I am not even sure if you can offset bad debt from this.

00ec25

anselld wrote: »

Yes you need to declare interest received. I am not even sure if you can offset bad debt from this.

no you cannot offset bad debt - this is a sore point with a lot of people on Zopa because of course you end up paying tax on interest you have received but have lost the entuire value of the remaining loan so are paying tax on money you do not have! zopa sends you a statement each tax year of your earnings, you simply declare the relevant figure

re tax generally, you will have to pay tax on any cash based deposit anyway (ISA excluded obviously) so your 3.25% in Egg is just the same as 7.6% on Zopa, both cost your marginal tax rate on the interest earned

a Zopa investment is more risky than a cash deposit of course but less than a corporate bond. The tax treatment therefore depends on what investment class you compare it with, it will never be comparable with equities so forget saying you pay Income Tax on one and get CGT relief on the other, compare the investment and its risk, not the tax regime

bristol_pilot

The fact that you cannot offset bad debt is the killer for me and why I don't lend on Zopa. As a higher-rate taxpayer especially, the returns you get are not worth the risk IMO. If I want risk I'll buy shares.

Sceptic001

Also don't forget that there is no FSCS cover for Zopa. If Zopa did go bust recovering the loans could be an interesting process!

Having said that, it is an interesting asset class if you are looking to diversify, that should give a better return than a savings account unless you blow all your money on Listings, which seem to be Zopa's equivalent of sub-prime lending.

I agree that drip-feeding is the best way in. If you get hooked it becomes more of a hobby than an investment.