Understanding Zopa

GavB79

I have deposited £1k in Zopa which cleared today, and have been playing around with the lending options.
Let's say I loan out at 8.5% for 3 years to the 'A' band; it tells me that after bad debts and fees my total return for the period should be about £1,100.

Now let's say I put it in a bank account for three years at 3%, but this would be compound so I would get a return of just under £1,100.

So why would I want to risk my money in this way? What are the pros and cons please?

xrjtg

On an A36 loan the money is paid back to you monthly, so you're free to go and do something else with the money for, on average, roughly half the time.

Zopa pros: you can get higher returns than savings accounts, especially if you look at the 60 markets. Compared to share based investments, you have a reasonably accurate idea of what your expected return is.

Zopa cons: no secondary market for now, which means you may have to wait if you decide you need the money. As money is returned over time you need to reinvest it if you want to keep earning. The tax position is currently unfavourable, as bad debt can't be offset against interest; this means that you have to offset bad debts with money that has already been taxed, which can affect the quoted expected returns significantly on the higher risk markets, especially if you pay higher rate tax.

If you decide you like the idea of Zopa, you might also like Funding Circle which launched recently and is a similar site but with loans taken out by small businesses.