What is your view on Zopa?

KnightSmile

I've been looking at ways to get a better return on my savings. I'm currently saving for a deposit so I can eventually acquire a mortgage, so I don't want anything remotely risky but want to maximise my profit nonetheless.

I have an ISA which returns 3% and I still have 3k left to put in here which will take me a few more months at least.

Looking a little further ahead is Zopa a good idea just to up my interest? I know there is varying amounts of risks but it doesn't seem like a reckless move. Another downside is the money is locked for 3-5 years.

Interested in peoples views.

K:)

http://uk.zopa.com/ZopaWeb/public/lending/lending-at-zopa2.html

Geoff23

KnightSmile wrote: »

I've been looking at ways to get a better return on my savings. I'm currently saving for a deposit so I can eventually acquire a mortgage, so I don't want anything remotely risky but want to maximise my profit nonetheless.

I have an ISA which returns 3% and I still have 3k left to put in here which will take me a few more months at least.

Looking a little further ahead is Zopa a good idea just to up my interest? I know there is varying amounts of risks but it doesn't seem like a reckless move. Another downside is the money is locked for 3-5 years.

Interested in peoples views.

K:)

http://uk.zopa.com/ZopaWeb/public/lending/lending-at-zopa2.html

I've got about £10,000 in ZOPA. I like it. You have to keep an eye on it if you've got your money set to "autolend" though.

And you can get (most of) your money back almost instantly now. You can sell your loan book to other lenders. The only loans you would have trouble getting rid of are (a) any that have missed payments already and (b) any that are at a really poor interest rate because you didn't keep an eye on your lending offer when the market changed.

Gorgeous_George

Hi

I love Zopa. Others have a more tainted view.

I have been lending a small amount since February 2009. I have made 1,468 loans and have 4 x bad debtors (loans that have defaulted but are being chased) and 6 x late (loans that are behind payment but not defaulted). If all 10 x loans fail to repay I will currently be suffering bad debt just over 50% of Zopa's estimates. I avoid the riskier markets.

What I like best about Zopa is the motivational aspects of seeing repayments come in and your 'Zopa Total' growing daily. Over time I have paid in £7,900 (including referral rewards) and have a 'Zopa Total' of £8,755.17.

Loans are over 3 or 5 years but you can get your money early by using Rapid Return. This costs 1% and is subject to lenders offering at rates lower than the loans you wish to sell.

At the moment I use my first direct regular saver at 8% first but my return in Zopa is more fun if not quite so financially rewarding.

I currently receive £322.93 per month in repayments of which £56.90 is interest (gross).

If you join, use a referral from the Referrals board and earn £40 to start you off.

GG

jamesd

KnightSmile wrote: »

I'm currently saving for a deposit so I can eventually acquire a mortgage, so I don't want anything remotely risky

Then Zopa doesn't meet your requirement. Zopa is a high risk investment that puts your capital at risk.

The high risk isn't just the making of personal loans with lots of cuts to employment coming, it's from one company setting the credit rating of the packages of loans you're buying and selling them to you with no outside agency participating in the rating, not even the ratings agencies that failed to properly rate packages of mortgages in the events that led to the market collapse in 2008. Zopa has no FSCS protection and no investment regulator.

The First Direct regular saver that pays 8% looks like your best initial move since it's as risk free as it gets. You can put in up to £300 a month and catch up on any unused allowance in later months. Would be best to start putting money in as soon as possible and use the full allowance before topping up the ISA, assuming that you'll use your full ISA allowance anyway.

The closest Zopa gets to that is the A* 36 month market where the rate before 1% charge by Zopa and bad debt that can't be deducted from income averaged just 6.5% last week. The bad debt estimate for that market is 0.5% so for someone not paying tax who sees exactly the estimated bad debt the effective gross interest rate to compare to savings accounts is 5%. For a 40% tax payer it's 4.7% (also before tax, the difference is deducting bad debt after tax has been paid).

With almost no risk the best ordinary savings accounts are paying 4.25% for three years. Then there are NS&I inflation-linked certificates that pay inflation plus a percentage, with at least something being paid out provided you have had the money saved for at least a year. Predicting inflation is hard but with the payment being tax free there seems to be a good chance that these will beat the Zopa payout, without any significant risk.

Your wording suggests that you might be only using the cash ISA allowance, not the stocks and shares ISA allowance, that doesn't have to be invested only in stocks and shares. Like Zopa the things in this place your capital at risk so if you're serious about not doing anything remotely risky you should not use this either.

The sort of funds that might be used and their yields include:

10.2% Marlborough High Yield Fixed Interest
8.9% Newton Global High Yield Bond
8.3% Newton Higher Income
7.2% Invesco Perpetual Monthly Income Plus (pays monthly)
6.3% Invesco Perpetual Distribution (pays monthly)
4.3% 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. There's no tax to deduct from these yields/interest rates inside an ISA.

I've used Zopa in the past but at the moment the rates are so low that I'm taking money out, not putting it in.

pqrdef

KnightSmile wrote: »

Another downside is the money is locked for 3-5 years.

Up to. In fact your money is being repaid continually. So, if you want to keep the interest rates, you have to keep re-lending it for a new term. But then, at the end of 5 years, your money isn't free, it's still tied up for another 3-5 years. You have to plan your exit years in advance.

Rapid Return is available for emergencies, but the 1% fee makes a hole in interest rates that are already tight.

KnightSmile

Thannks for all your replies - i was looking at the first Direct 8% account but only take home £1350 after tax and its £1500 minimum per month so a non starter.

I will look into the other options mentioned. Zopa does seem like a good concept but not ideal for something I can tie up some of my deposit.

Gorgeous_George

jamesd wrote: »

Zopa is a high risk investment that puts your capital at risk....

It's good of you to share your rather odd view of Zopa. Have they upset you or are you deterring new lenders to safeguard your own returns?

Most borrowers intends to repay their loans. Defaults are extremely low. Zopa is NOT high risk. If you think it is, you don't understand risk.

jamesd wrote: »

The closest Zopa gets to that is the A* 36 month market where the rate before 1% charge by Zopa and bad debt that can't be deducted from income averaged just 6.5% last week. The bad debt estimate for that market is 0.5%

A*36 was my market of choice before the introduction of Rapid Return. In this market I have lent over £5K and had more than £2K returned (capital) and earned £450 in interest. My bad debt rate in A*36 is 0.00% (no bad debt). I have a 2 late payers owing me £11.78. The other 663 payers are on time. If both of these lates paid no more my bad debt rate would 0.2% - a lot less than Zopa's estimates.

More than 600,000 members and it's interesting as well as fun.

GG

Ark_Welder

KnightSmile wrote: »

Thannks for all your replies - i was looking at the first Direct 8% account but only take home £1350 after tax and its £1500 minimum per month so a non starter.

I will look into the other options mentioned. Zopa does seem like a good concept but not ideal for something I can tie up some of my deposit.

First Direct monthly contributions are minimum £25, maximum £300.

Although it should also be noted that you need to have a current account (called the 1st Account) with them to be able to open this regular saver.

http://www2.firstdirect.com/1/2/savings/regular-saver-account?WT.ac=FSDT_LP_REG1043&coid=FD_Savings_REG1043

jamesd

Gorgeous_George wrote: »

Have they upset you

Just do a search here for my posts and you'll find me commenting on investments and loans for years, back before I'd even heard of Zopa. It happens that Zopa is often not the best deal for borrowing or investing at the moment. That's a shame for Zopa but good for borrowers and investors who can get better deals.

Gorgeous_George wrote: »

are you deterring new lenders to safeguard your own returns?

I'm not lending there at the moment and there's no reasonable prospect of me doing so in the near future. So no effect at all, and nothing that happens here could change the returns I'm getting on my existing loans.

Gorgeous_George wrote: »

If you join, use a referral from the Referrals board and earn £40 to start you off

Which will make you £10 if yours is used, unless I've missed a change in the terms.

Now, what I've done in the past in such discussions is pay 100% of the money to anyone who mentions the discussion, not keeping £10, so that I make nothing from any referrals it generates. Perhaps you'd care to follow my example and pay the full £50 to anyone who mentions this topic?

Gorgeous_George wrote: »

Most borrowers intends to repay their loans. Defaults are extremely low. Zopa is NOT high risk. If you think it is, you don't understand risk.

Hmm, I suspect that you have rather more to learn about investment risk. Lets start with the basics:

Zopa has no investment regulator.
Zopa has no FSCS protection for lenders.

Either of those alone is enough to make Zopa high risk.

I'll put the rest into a different reply, since it gets into rather more involved areas than just no regulator and no FSCS protection.

jamesd

Lets ignore those simplest high risks of no regulator for lending and no FSCS protection for the moment and move on to discussing lending risk.

I recommend that you start by reading about the role of credit ratings agencies and banks selling packages of mortgage loans in the market meltdown in 2008. You know, the main cause of the market collapse in 2008 that's still causing trouble today.

A major risk of Zopa comes from the parties who are doing the credit rating of the packages of loans and who are selling them and what that implies for risk. Lets compare:

Packages of mortgage loans: one of three independent credit rating agencies assigning the credit rating.

Zopa: Zopa assigns the credit rating.

Packages of mortgage loans: the banks selling the loans are independent of the ratings agencies, except for paying them.

Zopa: Zopa is doing the credit rating and selling the packages of loans.

What that combination does is introduce a conflict of interest. The body doing the credit rating is also the one that makes money from selling the loans. The more loans they sell, the more money they make. Even with the independent credit ratings agencies the mortgage loan system failed, perhaps in part because the sales people were paying the ratings agencies, so the agencies had an incentive to give good ratings.

Now it'd be nice if this was only a theoretical risk, but sadly it isn't, even in the UK. A couple of years ago one of the UK lenders was forced to fire some quite senior staff after they were found to have breached their own lending guidelines to meet lending targets. That wasn't Zopa. But it is part of the risk that lenders take when using Zopa.

That's OK so long as Zopa is perfectly ethical and all employees there always follow policies perfectly, or Zopa acts correctly to rectify mistakes, which are inevitable in any business. It's part of why I take any case where Zopa may act in a way that is not 100% ethical very seriously, because lenders at Zopa are 100% reliant on Zopa acting ethically.

If you look at just the performance of borrowers in the past, you're missing the big picture: the risk that Zopa might do less well in the future, because it's a structural conflict of interest in the Zopa lending system. Well designed systems either avoid those or tend to have external controls in the form of independent auditors to try to control them.

Or without external controls, Zopa could pay a significant portion of lending losses out of its own pocket, to better align its financial risk with the financial risk of lenders. That is one of the controls that been suggested for the mortgage markets, that those who make mortgage lending decisions and those who resell them be required to keep some of their own money at stake, so they aren't incentivised to sell, make their money, then pass on all of the risk.

That's also one of the other structural risks of the Zopa setup: Zopa gets its borrower fee paid for out of funds provided by lenders (but to be repaid by the borrower), even if the borrower never makes a single payment. A more risk-limiting structure would have Zopa getting paid only when the payments are made, so that Zopa also suffers a direct financial loss in such cases, beyond the costs of debt collection, which are charged, at least in part, to the borrower, should they be traceable.

Even if Zopa was to act perfectly for 20 years, a change could cause that to fail badly in the future. It's where external controls and auditing of lending standards could come into play and perhaps in the future Zopa will have some system for that, where the system is arranged so that the auditing party has a fiduciary responsibility to investors, not to Zopa. If that ever happens it'll be a significant step in reducing the investment risk associated with Zopa. It will still remain high risk because it takes time for controls to detect failures but it would be an improvement.

Zopa argues that it has an incentive to keep defaults low because they discourage lenders. Lets consider the merits of the assertion. Back in 2008 lending the default rate has so far been around twice the rate given at the time the loans were made (not visible on current data because Zopa changed to report against current rates). Yet we have you writing that defaults have been low so far, without mentioning the time when they were roughly double the rate specified. And we know that Zopa is not generally short of money to lend, but of borrowers, so the incentives are all wrong for the actual shortage - Zopa could lose a lot of potential lenders without it affecting business.

It is of some potential effect as a control, because I mention it here sometimes. But that's just one individual on a message board, hardly significant. For it to be a truly effective control it would need to be mentioned at least periodically in press stories about Zopa. And that doesn't seem to happen, certainly not enough to discourage lenders, as your writing here shows and as the excess of money available to lend also shows.

If you're interested in a discussion of risk we could discuss it more because I think it's an interesting subject that isn't really discussed enough in the P2P lending field. But for now I'll just write "high risk" as a summary because that covers it well without getting into a long essay like this one.

jamesd

KnightSmile wrote: »

i was looking at the first Direct 8% account but only take home £1350 after tax and its £1500 minimum per month so a non starter.

No need for that to affect you:

1. Faster Payments pay in £100.
2. Faster Payments pay out £100 two minutes later.
3. Repeat 14 times and you've now reached £1500.

Or use standing orders to automate it or move your pay in and out twice on the day you get paid.

You'd also get a signup bonus for the current account and can avoid the monthly charge by opening a savings account so it's some nice free money even if you ignore the regular saver.