Zopa lending

27col

I am considering investing some money via Zopa. Any comments based on personal lending using this method would be gratefully received.

jamesd

You can find some comparisons of Zopa with other options near the end of this discussion. It's not usually competitive with corporate bond funds but it's still interesting sometimes and I love the concept. Here's the comparison with savings rates and a link to corporate bond funds that I posted over there:

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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).

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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.

27col

Thanks for your input James. I notice that you mention bad debt a lot. Do you know how many of your Zopa loans have actually become bad debts. I was not thinking of going into Zopa in a big way, maybe £1000 or so.

jamesd

27col, sadly I have to mention bad debt a fair bit because of that tax issue in the Zopa screens. It's a pain but it beats not mentioning it.

At the moment from the markets part of Zopa I have just one loan in the C60 market that's written off, with the borrower apparently not found at the address they were at when they borrowed. From Listings I have 13 £10 units to two different people, neither of who seems to have had any real intention of paying off their loan. One of those seems to have left the place they used to live and the other has made an IVA that may eventually pay 48% of their borrowing. Total originally borrowed on these loans was £140 and just £7.97 of capital has been paid off on them.

"Late" is loans in arrangement or being chased by the collections agency, a total of £160 originally lent on them, £31.92 of capital repaid so far. Those are:

1. B36 market, £80 lent to one borrower who lost their job. Borrower asked Payplan to help but they couldn't because income was negative (presumably less than expenses). With insufficient income this looks likely to become an IVA or bankruptcy situation if they don't find another job.
2. B60 market £20 lent to one borrower. Borrower left the country and says they will make a payment arrangement when they get settled in their new country.
3. C60 market £20 lent to one borrower. Borrower is working with a debt management company, which has received a token payment from them.
4. C60 market £20 lent to one borrower. Debt collection agency received a payment from them fairly recently, general situation unclear.
5. Y69 market £10 lent to one borrower who paid £1.30of the capital and then lost their job and plans to make token payments until that changes.
6. Listings 12 month, £10 lent with £6.19 capital repaid. The debt collection agency has been chasing this person and Zopa are apparently trying to do something about it as well.

And for completeness £1370 in fully repaid loans and £4,390 that are on time or only a little late. All of these lent amounts are the original amount lent, not the balances outstanding.

Bad debt isn't a great problem so long as it's reasonably in accord with the allowances that Zopa suggests. You have to expect it as a fact of life because people do lose their jobs, die or make fraudulent applications or otherwise have trouble of one sort or another. The amount that's written off increases over time, and is naturally higher for the higher risk markets. Eventually it's supposed to stabilise with some picking up payments again to compensate for those who stop paying. By the time the natural term of the loan is over everyone left will be late, in arrangements or IVA and that could last for years beyond the original term.

Please don't hesitate to ask for more details about this or any other aspect of my loan book, I'm generally happy to provide very full information so people can go in as well informed as possible.

27col

Thanks again james for the information. I was reading the Zopa bumf this afternoon and I noticed that it mentioned some sort of insurance, presumably for borrowers. Is this likely to be similar to PPI, or have I misread something. Presumably it's not compulsory.

jamesd

There used to be a payment insurance product for borrowers but it was discontinued. For investors there used to be a guarantee of a minimum of 10% of written off money from the debt collection agency after a default but that was also discontinued, including for previously made loans. For a particular class of small business startup loans via Listings there's also a guarantee scheme from PRIME for more of the money but those are rare at the moment.

Apples2

Sorry to jump in (Zopa noob) here but people don't take out loans for £20.

Does the above info suggest Zopa share the risk amongst many lenders? i.e someone borrows £1,000 and zopa takes £20 from 50 lenders?

27col

If you read Zopa bumf Apples2 you will see that that is exactly how Zopa operates. With the loan spread amongst 50 lenders, if the loan goes bad the loss is also spread among 50 lenders, so no one loses too much. I cannot imagine that many people would be prepared to lend the whole sum to someone whose credit worthiness they were not sure of and did not know. This way the pain is shared.

Gorgeous_George

You can earn 6.5% before bad debt and tax quite easily. I have been lending for just over one year and have approximately £4,000 lent out to 471 borrowers at an average rate of 8.44%. I had 3 x £10 loans disbursed today at 7.8%.

At present, I have no Late Payments and just one loan classed as Bad Debt (debt collectors chasing the defaulter). I avoid the riskier markets and my lone bad debt was to a listings applicant who, with hindsight, was a poor risk made at the beginning of my learning experience in Zopa.

Take off the Zopa fee and my return will be 7.44%. I may well experience more bad debt in the future that will dent this return however, I believe that my strategy of avoiding the riskier markets and longer term loans will prove to be wise. I may, of course, receive some or all of the money that is classed as Bad Debt although, in my heart, it is gone - but good value for the learning experience.

GG

27col

One final question (I hope) before I take the plunge into Zopa. When your money is loaned out via the market. Do you get any choice, or is it just allocated by the Zopa team.

jamesd

No choice beyond picking the markets to offer in and rate to offer at. It's allocated by the Zopa computer system when someone asks for a specific quote rather than a generic one, after they have supplied their name and address.

You can have more than one offer in a market. If you do that then all of those offers could be matched and more than £10 lent to one borrower. You might want to do that to use a method called Easteregging where there are a series of offers at ever-higher interest rates. Zopa matches from lowest rate to highest and for larger loan sizes or times of relative fund shortage in the market the higher rate offers will be matched. This gets a higher average interest rate at the cost of a higher exposure per borrower.

For the A*, A, B and C markets any offer made in the C, B and A markets is automatically made available to the lower risk markets. This can cause you to unexpectedly have multiple offers matched to a single borrower. You can reduce the chance of this by having offers for many markets in a single offer because only one match will be made from such a combined offer. That match will be the lowest one that can be used. Offer 9% to A* and 8.9% to A in one offer and it'll be the 8.9% that's used for A*, not the 9%. You can end up in this situation if you tweak your offers based on competing offers, say to go just ahead of a large pool of money at a specific rate.

I normally use ten to fifteen offers at ever-increasing rates. When I see matches it's usually only the lower rate offers that are used but sometimes the higher rate ones do get included. This is why you can see £10, £20 and £80 lent to one borrower in my bad debt post earlier - those had matched several offers.