Where to invest £1000+ per month?

Jonbvn

JackRussell wrote: »

I've been using Zopa, as a Lender, for some time now... 2 years. I regularly drip feed £100 per month into it, and set it to Auto lend to A36 (responsible people over 3 years).

My current rate I lend at is 8% which seems to be working out quite well. The return has been better than a bank account and so far, touch wood, I've not had any bad debters.

The important thing to remember is that using Zopa as a way to build your savings is LONG TERM. There is no way of getting your money back early no matter what the circumstances.

There is a new P2P lender on the block called Funding Circle. They allow you to resell your loans early, and they are currently offering 2% cash-back.

jamesd

You should ask your cash ISA provider why they are saying it's fully used with only £2,000 in it. Did you pay in more than that and take some out at some point? If it's just a limitation of this provider you have the option of transferring the £2,000 to a stocks and shares ISA. That resets your cash ISA contributions for the year to zero so you can start again with up to £5,100 cash. Subject to the total payments in for cash and S&S combined being up to £10,200 a tax year.

The ability to transfer from cash ISA to S&S ISA can let you put money into cash now while you build up your emergency fund then move to the better long term S&S ISA option later. Or you could take more risk and put the money into the S&S ISA immediately and continue with that until you hit the total ISA limit, then switch to either cash savings accounts or funds in a fund or share account.

Zopa isn't a very good deal for lenders at the moment, compared to the alternatives. Here's a list of funds sorted by yield (interest and dividends combined) that pay tax free inside a S&S ISA. Something like Artemis High Income or Newton Higher Income is well established and often recommended for those who want income. As with Zopa, capital is at risk and the capital value will vary over time.

The not so well disclosed parts of Zopa include:

1. Bad debt is deducted after tax, so you're effectively paying tax on it. But Zopa ignores the tax on the lending screens, so it looks as though you're getting more than you will get after tax. Average lending rate to the most popular A36 market last week was 7.1%. While Zopa says that's gross I'll assume it's after the Zopa fee. Then:

After higher rate tax: 4.26%
After 1% bad debt allowance: 3.26% (equivalent for tax free comparisons like ISAs)
Grossing back up: 5.43% (equivalent for taxable investments)

Those numbers just don't compare very well with the returns people who are willing to put their capital at risk can get from other types of investment and are even worse compared to investments in a tax free S&S ISA.

2. Starting a few years ago lending at Zopa changed from having bad debt rates way below the Zopa numbers to being twice those figures, with the two to three year ago loans at twice, one to two at full level already and still rising, while one year still is too immature to have much bad debt (it rises over time). If this is maintained at twice the allowance the higher rate becomes 2.26% after higher rate tax and bad debt grossed up to 3.77%.

3. There's no FSCS compensation if Zopa goes bust or if there's fraud or misrepresentation by Zopa. The investment part of investments is not protected either, but you are protected by the FSCS for unit trusts if the company goes bust or if there's fraud or, for FSA regulated investments, if there's misrepresentation. Zopa badly needs an investment regulator that would impose a requirement to treat customers fairly.

4. Bad debt is quite low for the first year of loans. Bad debt also arrives randomly. To hit the A36 bad debt allowance takes just one £10 default per thousand Pounds lent and it's a lottery whether the one in a hundred chance will strike. Easy enough to have no bad debts at all when ending a few thousand Pounds over a year or two. Or to get the other side of the luck and have a few times the average rate.

I still have offers there at times but those are at rates that are rarely available.

Even though I've done reasonably with Zopa, I'd have done substantially better elsewhere. Today it's of most interest for a little diversification, if the returns are high enough to make that worthwhile, or more realistically, given the low returns, for its entertainment value. For unregulated investments like Zopa the sensible limit is a maximum of 5% of your capital, or less.

In any case Zopa lacks something you're after: you can't get your money out in a hurry. Once its lent you have to wait for borrowers to repay over the whole loan term.

If you do like some educational entertainment, you can join this sort of experience (status updates are summarised and paraphrased by me):

08/09 IVA agreed at under 50% of the money lent. First payment expected in May 2010 and then quarterly.
07/10 Payment not received in May (it's now July) and Zopa are chasing the insolvency practitioner monitoring the IVA.
09/10 First payment is now expected by April 2011.

So not only did that borrower default on their loan within a few months, they defaulted on their IVA as well. Will be amusing to find out if they make the April 2011 payment or are just stringing things out as long as they can.

Or there's the handy new debt relief order that writes of debts for those without much in the way of money: 04/10 A Debt relief order was made against the member.

It's interesting to see the lender side of the credit business.

Rob_192

Pipo

Do you have a mortgage? If so, consider overpaying it, this was one of the best investments I ever made.

R

pipo

Big thanks to all who contributed. Couple of things:

• Cash ISA is maxed-out. I have already put in £5100 over this financial year but have drawn out £3000 partly because i didn't fully understand how ISAs worked, and partly because of a couple of emergencies.
• I do have a mortgage and i'm already overpaying that (only by a small amount at the moment) but may look to increasing soon.

lisyloo

I do have a mortgage and i'm already overpaying that

Before you overpya check the rate.
Traditional advice is that it's good to overpay debt which is true on the whole, but some people have fantastic deals now that base rates are at 0.5% (I have 0.99% myself).
If you are lucky enough to have a low rate, then it doesn't make sense to overpay. You'd be better off savings/investing instead.

On the otherhand if you have a high rate, overpaying is a good thing to do provided you have enough money put by for a rainy day.

John_the_Boy

Also check if you can only make a yearly overpayment - some lenders hold on to your overpayment and then deduct the amount once a year so you have lost any interest you could have gained on this money if you had a separate account and paid the money off once a year.

JackRussell

I think what you take from this, is that its best to have your eggs in more than one basket

Zopa, Gold, Isa, Wine, Cheese

pipo

JackRussell wrote: »

I think what you take from this, is that its best to have your eggs in more than one basket

Zopa, Gold, Isa, Wine, Cheese

Quite. :T

After some deliberation this is what i think i am going to divide everything by:

• Pension - 30%
• Regular Saver - 25%
• S&S ISA - 20%
• Normal Savings - 15%
• "Other Investment" - 10%

First thing i'm going to do is transfer my e-ISA from NatWest as it looks as though they have been a little bit stingy with their rates. The only accessible account above will be the 'normal' savings. Now i just have to research providers for each of the above and try to figure out what my 'other' investment is going to be on.

Please feel free to rip my list apart and make suggestions if you want. Not sure about the cheese though...unless you make a compelling case, that is.

pipo

PS, i am going to give Zopa a try as well but will just invest a tiny bit for now and see how that gets on for 3 years or so.

jamesd

pipo, when lending at Zopa, do remember that you can get better than the rate suggested by the ZOPA on the lending screens. The higher above that you ask for, the less often your money will be matched. So what you can do is set a high rate then adjust it downwards until it's just low enough to lend money out at the speed you want. Also know that supply and demand varies so don't be in too much of a hurry to drop rates if it happens to be a quiet time.

Zopa seems not to have liked my earlier post so I've asked if I can publish their email and if they say yes I'll reply to it here. Not really a surprise that they wouldn't like comparisons with other options, though. Still, it's interesting and educational or I wouldn't be using it a little myself.