Anyone lend out with ZOPA?

rictus123

7.3% gross average after fees and bad debt last year? Surely everyone is jumping on then?

xrjtg

I have a reasonable amount loaned out, but the loans were made over last summer. The last time I checked the rates there wasn't enough of a premium for me to compensate for the inflexibility and risk, so I'm not making new loans at the moment.

I also have a very little with the business-focused Funding Circle, but as that started later it seemed to hit the low rates sooner.

rictus123 wrote: »

after fees and bad debt last year

I've just checked their website, and it seems that that figure doesn't take account of the bad debt.

Zopa wrote:

Average rate enjoyed by lenders on money lent over the last 12 months (after fees and before bad debt)

mr_fishbulb

From what I've heard the average has dropped down so it's not going to be 7.3 now. Plus you need to pay income tax on it,

skid112

i had a reasonable amount there too up till mid last year slowly taking it out as bad debt has been increasing even on the A* and A markets where i predominantly lent

jamesd

Last week: £1,383,260 was lent out to borrowers at an average gross rate of 7.44%.
One year ago: £631090 was lent out to borrowers at an average gross rate of 9.17%.

That's new lending last week at 1.73% below the rate for the same week last year. It's not necessarily fully representative because the average rate depends greatly on the mixture of markets where the loans are made but it does show what has happened to rates in general over the year.

What that means is that you aren't going to get the last year rate, you're going to get the current, lower, rate.

To get some idea of why rates have fallen, look at the two and five year demand vs supply charts and notice how demand is much lower compared to supply than last year.

If you're interested in investing like that at Zopa where you're placing your capital at risk you should also look at investing within a stocks and shares ISA. The sort of funds that might be used and their yields include:

9.2% Marlborough High Yield Fixed Interest
7.7% Newton Global High Yield Bond
7.2% Newton Higher Income
6.5% Invesco Perpetual Monthly Income Plus (pays monthly)
5.9% Invesco Perpetual Distribution (pays monthly)
3.9% Invesco Perpetual Income

Those yields are historic and not guaranteed. The capital value varies, by as much as 40% in some of them. You'd use many different funds, not just one. Fees and bad debts will be taken from capital for most of those.

No further tax to pay on these in a stocks and shares ISA an the interest paying ones don't have any tax on their payments anyway. You can get the capital back at any time within a week or so.

Those rates show a bit more of why people who are willing to put their capital at risk aren't necessarily going to be keen on Zopa: you can get better rates elsewhere, without having to pay tax on the interest and bad debt.

I've a loan at Zopa and money lent at Zopa. At the moment I'm taking money out as fast as it's returned. I can get better returns for new money than the Zopa ones.

If you want something almost risk-free that clearly beats Zopa rates for a year, take a look at the 8% regular saver account from First Direct.

Here's an illustration of why bad debt is very important. The last weekly letter to lenders said "Your average gross lending rate (after fee) on loans made ... since you joined is 13.81%". 13.81%! Great, bite their hand off! Until you look at the rest of the picture. Here's what my tax statements say, with rounding:

2008: loan interest £210 fees £7 bad debt £0
2009: loan interest £491 fees £19 bad debt £150
2010: loan interest £388 fees £13 bad debt £306
Total loan interest £1089 fees £39 bad debt £456

After basic rate tax that's:

(interest 1089 - fees 39) * 0.8 taxed - bad debt 456 = £387

Grossing that back up it's £484 savings account equivalent, just 46% of the headline rate. 46% of 13.81% = 6.35%. Not bite your hand off territory compared to risk free rates three years ago.

For higher rate tax it's a bit worse:

(interest 1089 - fees 39) * 0.6 taxed - bad debt 456 = £174

Grossing that back up it's £290, 27% savings account equivalent, now down to 27% of the headline rate. 27% of 13.81% = 3.7%. Hmm.

The fine print matters a lot at Zopa. And at the other peer to peer lending places. Most of my lending was done when Zopa was still saying that bad debt was deducted before tax, so I did a fair bit of lending in higher risk markets that make much less sense for tax payers when the true picture is known.

Results vary. Those are mine. Since there's an element of chance in it others who lent mostly in 2008 will have different results, some better, some worse. Those who didn't lend in 2008 will generally have had less bad debt because bad debt rates for that year were around twice Zopa's allowances at the time the loans were made. They were raised subsequently and the bad debt report now has been changed to use the current rates, not the ones people were told to expect when making the loans. That leaves me unimpressed: Zopa's key job for risk management is getting the lending decisions right and knowing how they did compared to their estimates at the time the loans were made is the key measure of their success or failure at doing that.

If you do lend at Zopa you can reduce the bad debt risk a lot by picking the lower risk markets. If you're a tax payer, particularly 40% or 50%, the higher risk markets just don't make sense. But they are included in the before tax average return that Zopa quotes... and you can see what that did to my returns.

jamesd

The trouble with that effective 6.35% is that it was for money put in back in 2008/9, not today. Back then that sort of rate was available on term deposit accounts and 10% regular saver accounts were available, without any significant capital risk or uncertainty.

Income funds often deduct their fees from capital, which wouldn't show up in those yield numbers. They do that because the assumption is that people want the income paid out so prefer deductions from capital. Most of those probably do this, I haven't checked. The fund information sheets should say, if not the fund manager can answer. If you chart them at say Hargreaves Lansdown you can choose to show total return and that will include income, capital and fee effects.

I put some illustrative charts in How to boost retirement income for some funds and you might find that interesting. Again a focus on income, not maximising total returns, but it's useful to compare the capital value and total return charts.

Here's how the tax is handled for each if held outside an ISA:

9.2% Marlborough High Yield Fixed Interest - taxed as interest
7.7% Newton Global High Yield Bond - taxed as interest
7.2% Newton Higher Income - taxed as dividends
6.5% Invesco Perpetual Monthly Income Plus (pays monthly) - taxed as interest
5.9% Invesco Perpetual Distribution (pays monthly) - taxed as interest
3.9% Invesco Perpetual Income - taxed as dividends

If taxed as interest, outside a tax wrapper you get the net payout and reclaim the 20% tax if not a tax payer, or tell HMRC if you have higher rate tax due. If taxed as dividends there's no more tax to pay for basic rate, is more for higher. For either there could be a capital gains tax gain or loss to consider. CGT losses can be deducted from CGT profits to reduce tax.

Unless you actually want income I'd skip those, except perhaps Invesco Perpetual Higher Income. If you're willing to take money as capital gain you can probably get better returns and CGT treatment is better than interest tax treatment unless you're using your CGT allowance each year also. Those funds are mostly chosen for income production and being known names because that's easier for people to compare to Zopa.

Good luck with your bad debts experiences at the PTP places. It'll probably be a year or more before you start to get some useful feel for what effect that will have on your returns. That's in part because it often takes a while to default and in part because there's at Zopa usually many months of delay between a loan first starting not to pay and Zopa deciding to write it off. That's usually not a bad thing, mostly it's due to debt collection attempts.

The fund fees question is an interesting one that prompts lots of discussion. I use both tracker and managed funds, depending on what I'm after and what happens to be available in the place where the money is located.

If you do look at those funds, here are a couple of things to know about two of them when it comes to past performance:

Newton Higher Income isn't usually a good fund to hold during a market recovery because it sells options that limit its capital growth to boost income. The effect is very obvious compared to the rest of the market in the charts.

Invesco Perpetual Income's manager has been quite cautious and staying cautious hurt growth during the recovery. As it turns out there wasn't a double dip recession in 2009 or 2010, so that cost capital growth. Up to you to decide whether you think caution is good or bad at the moment. Since it's hugely popular with retired investors it's probably no bad thing for the manager to take a cautious view.

Those are the sorts of things that are worth knowing about managed funds and that can help to make them a better or worse choice sometimes. Whether that's good or bad depends on what you're looking for.

jamesd

I should mention, some of my lending was done on Listings, not just Markets, at Zopa. That lending was done with a minimum required interest rate of 16% because of the expectation of higher than markets bad debt rates. The Markets picture would be a little more favourable if I had convenient numbers that excluded Listings. Using original loan values, not value written off, about 24% of my bad loan value is from Listings.

Actual Listings default value so far is around £165 and interest paid is around £200 before tax. Some people have been very badly burned, though I'm considerably better off than them.

The tax treatment of bad debt and higher expected bad debt almost certainly makes Listings an exceptionally poor deal for tax paying lenders. It's unlikely that I'd have done any Listings lending if I'd known the tax treatment of bad debt when I did it.

MoneySaverForever

I haven't used it personally, but I have heard about it and one of my friends said it's a really good service xxx

Gorgeous_George

Hi

I joined Zopa in February 2009. My overall rate using Excel's XIRR function is 6.7% after bad debt and fees but before tax. My bad debt is £25.33 from 1,337 microloans worth £13,720.

The bad debt is from B markets and Listings. I have exactly £12,000 loaned to the safest two markets (A* and A) with zero bad debt althiough I have a Late payer in each of the A* and A markets owing a total of £16.28. The bad debt could be recovered eventually and the Late payers will probably catch up again.

Averages are all interesting of course but you can lend at above average lending rates if you wish.

I find Zopa more motivational than a bank account although I will be starting a new first direct regular saver (8% I hope) when my current one (5%) matures next month. Some of the money from my current one may end up in Zopa.

GG

barak

jamesd wrote: »

.....Here's how the tax is handled for each if held outside an ISA:

9.2% Marlborough High Yield Fixed Interest - taxed as interest
7.7% Newton Global High Yield Bond - taxed as interest
7.2% Newton Higher Income - taxed as dividends
6.5% Invesco Perpetual Monthly Income Plus (pays monthly) - taxed as interest
5.9% Invesco Perpetual Distribution (pays monthly) - taxed as interest
3.9% Invesco Perpetual Income - taxed as dividends

If taxed as interest, you get the gross payout and tell HMRC. If taxed as dividends there's no more tax to pay for basic rate, is more for higher.....

jamesd - Not sure why you say that interest paying [=bond/fixed interest] funds pay Gross Interest. Surely they deduct 20% tax and distribute the Net. Within an ISA, the ISA manager will reclaim the 20% tax deducted.

grumpycrab

I've just done my tax return so would also be interested in why jamesd says Bond interest is paid gross. [Obviously we're talking non-ISA].
I thought this income was paid net of 20% tax. Non-taxpayers can claim this back, Basic Rate payers have nothing to do, Higher Rate payers must pay an extra 20%.