Zopa lending

Gorgeous_George

Understanding the effects of 'Exposure per borrower' is vitally inportant. Easter Egg your offers and you increase the exposure oer borrower. If that borrower turns bad the loss is greater.

I prefer just one offer - set at the rates that I want in the markets that I like. Currently set at 7.8% for A*36 and 8.4% for A36. I'm approaching 500 loans made to date an no late payers. I have just one bad debt in Listings (a loan that I wouldn't make today).

GG

jamesd

Yes, exposure management matters. For Easteregging (named after an investor called Easteregg) the higher returns from the higher rate offers compensate for the increased exposure. You do still need to ensure that your bad debt allowances when combined and using some of the extra margin will cover the loss from a default. Different people will have different tolerances for this, some finding a loss of more than £10 in one piece too painful, others accepting that they are deliberately accepting the higher loss per default in exchange for increased returns. A bit like market choices really, some people will prefer to lend to just the lower risk markets.

These differing preferences shouldn't be surprising because people studying the major financial markets have found that investors in general are hurt more by losses than they are made happy by corresponding gains.

Gorgeous_George

It depends on how you look at it. I see Easter egging as a way to guarantee that your returns are not as good as they could be while also increasing your exposure to the dodgier loans.

GG

jamesd

Why do you think it causes returns to be lower when all it does is offer additional money at a higher rate?

Gorgeous_George

For a borrower to be happy to accept an higher overall rate, they are likely to be higher risk (i.e., cannot get a more competitive loan elsewhere)*. If a lender understands that the EE method increases exposure to the higher risk loans then that is fine.

The Easter Eggers offers at, for example, 9%, 10% and 11% could have been one larger offer at 11%. Therefore the lender gets an average rate of 10% when they could have had 11%. That's lower.

I understand that any spreadsheet will show a higher return but it doesn't show the underlying risk.

* I wonder if loans made up of more EE offers have a higher failure rate.

GG

jamesd

The trouble with that view is that there hasn't been any sign that its true within each market.

That's not too hard to understand when you consider that even the highest rates for a complete package of market loans via Zopa don't end up going over the 16% that's a routine credit card rate. Here's a list of my earliest market loans. OA is overall rate, ME is amount I lent to the borrower and the gross rate then rate after fee and bad debt allowance:

OA12.53 ME 20@13.20/ 9.00 17 on time payments
OA12.88 ME 30@13.70/ 9.40 19 on time payments (some extra)
OA13.72 ME 10@15.70/12.30 17 on time payments
OA11.59 ME 10@15.70/14.80 17 on time payments
OA14.05 ME 80@15.36/11.96 17 on time payments
OA12.17 ME 60@13.92/11.82 paid off after 12 payments
OA12.11 ME 30@13.20/10.70 17 on time payments
OA14.19 ME330@17.86/13.66 on time, 18 direct debits, one missed, second try worked Y36
OA12.86 ME160@14.04/11.94 paid off after 13 payments
OA12.19 ME 30@12.97/10.87 first DD failed, second try worked then 16 on time
OA15.25 ME280@17.23/13.63 paid off after about a month C60
OA10.55 ME 10@11.40/10.50 18 on time payments (some extra)
OA10.58 ME 10@11.40/10.50 16 on time payments
OA14.86 ME300@17.49/13.89 15 on time payments C60
OA14.03 ME 70@15.53/11.93 15 on time payments
OA11.49 ME 80@13.33/10.83 10 on time then job lost, paying as able, B36 market
OA10.01 ME 20@12.15/11.15 paid off after 3 payments
OA12.33 ME 60@13.47/11.37 15 on time payments

That's a range covering A*, A, B and C markets and the only one with trouble is in the 36 month B market at an overall rate of 11.49% (plus the effect of the Zopa borrower fee).

Perhaps easier to see when you realise that the main reason a second and higher rate will be matched when there's plenty of money around is just that the loan size is larger, so a greater number of offers must be matched. Since matching is from lowest rate to highest, that ends up including some higher rate loans when the loan size is big enough. This won't get to the rates I'm after, that takes a shortage of funds as well.

Even when there's a shortage of money in the markets much of the money will still be coming from the lower rate offers, with the higher rate ones used to make up the total required. Eventually the lower rate offers can run out but what happens then tends to be just an inability to lend as much money as the borrower wants.

There could still be an effect, but if there is one, lenders haven't had enough data available to them to see it. Zopa might have enough and might have seen an effect.

For the higher amount lent by me loans the borrower ended up paying me over 18% to get the last ten or so £10 chunks from me to make up their requested loan amount. The rates went that high because there was a shortage of money in the market, so some loans used offers up to 20%. But that's rare. Would you take 19.99% to offer someone an extra £10 on their Y36 loan? I did. And 19.8, 19.7, 19.6, 19.5 and on down for some other £10 chunks. But even paying me those rates the overall rate was still 14.19%, below typical credit card rates. That was a loan between 7500 and 9000 total value for debt consolidation by someone under 30 so the borrower probably ended up better off by a fair bit if they were coming from the higher end of credit card rates.