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jamesd

Gorgeous_George wrote: »

I also understand the rewards - such as a rate of return greater than that of a savings account

Lets take a look at that. Best three year term deposit is 4.7% from ICICI with full FSCS protection.

4.7% after basic rate tax is 3.76%. Add the 1% A36 bad debt allowance and that's 4.76%. Back to before tax and that's 5.95%. Add a 1% Zopa fee and it's up to 6.95%. For higher rate it's 7.37% needed to match the ICICI account.

Average lending rate given by Zopa for the week ending 1 Feb was 6.9% for the A36 market. Of course, Zopa ignores the tax and claims that the expected return from a 7% offer is 5%, regardless of what tax rate you pay.

Compare that to this list of 29 funds that have a yield of 7% or higher, one as high as 12%. And these can be held inside a S&S ISA to avoid tax as well as being provided by companies with FSCS protection (though not for capital or income variation).

Whether any gains for above average results at Zopa are worth losing the FSCS protection and putting the capital at risk is something for an individual to determine. For those lending at less than the average rate, some of them are presumably getting a lower expected rate than they could get from the savings account, so they are getting the risk and a lower return.

You don't have to stick to the average rate, though. It's possible to do a bit better and on uncommon occasions it's possible to compete with the higher paying corporate bond fund, as I try to do when lending at Zopa. I simply don't lend when rates aren't worthwhile.

Same calculation but this time for higher rate and the C36 market. 4.7% is 2.82% after 40% tax. Add 5.2% bad debt allowance and it's 8.02%. Back to before tax and that's 13.37%. Add 1% fee and it's 14.37%. Average lending rate in this market for the same rate was apparently 12.2%. Of course Zopa ignores tax and will say in the lending screens that a 14.4% rate has an expected return of 8.2%, not a hair over 4.7%, potentially misleading higher rate tax payers into making offers that are 3.5% too low if they are trying to match the savings account rate.

Now, those are expected returns, Zopa for one of the one year periods turned in twice the anticipated bad debt rate, enough to push a higher rate tax payer who believed Zopa and got the average bad debt rate into a loss. That's three of the problems with Zopa in one: the risk to capital and starting out with a higher return than you eventually get, Zopa still ignoring tax in the calculations even though bad debt allowances can't be deducted before tax and Zopa for years saying that they could be deducted before tax even though the law saying they can't is a hundred years old.

If you want to put your capital at risk as you do with Zopa there are usually better returns to be had elsewhere, without locking your money away for so long and losing the FSCS protection.

There are plenty of reasons to like the Zopa concept and I love it but still, when I'm making investing decisions, I look at the competing options as well and Zopa doesn't usually compare so well for either investors (vs corporate bond funds) or many borrowers (vs 0% for 16 month credit card introductory offers with 4% fee).

Gorgeous_George wrote: »

However, once understood, a reasonably sensible lender can mitigate potential losses quite well.

A shame that Zopa doesn't tell investors about the effect of tax, so most lenders will end up believing the Zopa lending screens and seeing returns that are higher than their real expected returns. You and I understand this but that doesn't help those who just read what Zopa tells them.

It was also pretty hard for higher rate tax payers to do it in the one year tranche that had around twice the expected default rate: they both got twice the expected losses and Zopa was telling them that they could deduct losses before tax, so a twice the loss and half the provision situation to deal with. A position four times worse than portrayed isn't fun to deal with.

Declaration of interest: I both have loans via Zopa and offers at Zopa, at rates that do compete with bond funds, but which don't get matched often.

MarkyMarkD

Thanks, James.

I'm not saying that Zopa is a bad deal for everyone. But I'd stick to my assertion that most people don't understand risk properly when using Zopa.

And irrelevances such as

the satisfaction of taking some business away from the banks

please! Either it's financially worthwhile, or it's not.

Never mind that, if you want to be in the business of lending money to people, you could simply invest in a portfolio of bank shares and (in normal times) earn a better rate of return than from Zopa.

jamesd

Many people do like the idea of taking money from banks, though. It's a fair bit of marketing I think. Zopa has no obligation to point out the best competing options, that's what we do here.

Zopa not correctly presenting its own risk estimates to tax payers under current tax law is a different matter, though. For me that's a major ethical failing and a substantial investment risk red flag that's caused me to greatly reduce the amount of money I'm willing to trust Zopa with.

Gorgeous_George

jamesd wrote: »

Average lending rate given by Zopa for the week ending 1 Feb was 6.9% for the A36 market.

My average lending rate in A36 is 8.31%. Your persistent use of incorrect figures has been pointed out more times than I care to remember.

Each to their own of course.

GG

jamesd

Georgeous George, I'm glad that your overall averages is higher than the recent average, so is mine - 9.3% ignoring bad debt and fee - when I did the lending, which isn't recently. How did you do over the week ending 1 Feb? I did no lending at all during that week.

Which of the figures above do you claim is inaccurate and why? That average lending rate figure is from Zopa, without any adjustment at all by me. Do let me know if Zopa has said somewhere that it's not the gross lending rate or is different in some other way from a lending rate average for the market and I'll adjust appropriately. The only ambiguity I recall for this one is whether it's the gross rate or the rate after deducting Zopa's lender fee. Would be nice if it's after deducting the average fee.

While these rates aren't generally achievable, here are the average rates I've obtained in each market at loan inception, before bad debt or fees:

A*36: 9.22%
A36: 9.3%
B36: 13.33%
C36: 13.1%
Y36: 17.46%

A*60: 10.39%
A60: 12.12%
B60: 13.84%
C60: 15.32%
Y60: 13.72%

Picking when to lend is critical to getting higher than average returns. Most of my higher risk market lending was done before we learned that bad debt can't be deducted before tax, so they aren't high enough for that or the higher bad debt allowances in some markets today. Since I am handling that according to the current tax law that makes my offers in those markets uncompetitive with those made by people who believe Zopa's lending screens, so I'm not expecting to do much lending in those markets. Beats lending at rates that are too low, though.