Zopa Questions

tjg04

Hi I have some questions about lending from Zopa. I wish to borrow around £5000. I've taken advantage of Zopa's "soft" search facility and I got a quote from them for 11.1% APR. My questions are thus: is this rate fairly typical for borrowers in the young category (I'm 25)? Or am I seen as a risk? I earn approx £47k per year gross, have approx £1100 outstanding on a 0% barclaycard due to be cleared by June (£3500 limit). I have a cashback AmEx £2000 limit cleared monthly. And a history of various cards and phone contracts dating back to when I was 18, no missed payments or blemishes and no other debt. I rent privately and am on the electoral roll. I have two closed credit cards that should be dropping off my file this month, for £5500 and £4500, would this have an adverse effect? They've been closed for a couple of months, but had small positive balances that I was unaware of so have remained on my file. I'm attracted to Zopa as I can pay back early without penalty, but the rate doesn't seem that great (or am I being overly optimistic?). Would I be better off risking the extra searches on my file and getting a few quotes from more mainstream lenders. In case it matters I've only been with my bank First Direct since June last year.

Thanks in advance.

27col

The Zopa interest rates are set by the individual lenders, not by Zopa. I have noticed that as a lender, the interest rates have gone up a bit recently. If you look on Zopa website, you will see what the recent rates are.
It depends on what market they have put you into from your details in your application. If you take the time to peruse the web site thoroughly you might well get a good idea why you are in one of the higher interest markets.
I see that the ages for the young market are from 20-25. So it looks as if that is the market that you have been placed into. If you can wait until you are 26 then presumably you will get a lower rate by dint of being out of the Y(young) market.

bengalknights

I would suggest asking first direct as they have access to the HSBC pool which at the moment are cheaper loans.

tjg04

Thanks for your replies. I had indeed nosed around the Zopa website and had found that I would be placed in the Y market. I was hoping someone like yourself, who invested in Zopa, would be able to give me an idea of the range of rates typically offered by lenders in this market. If 11.1% is the best one can expect from the Y market then I will take bengalknight's advice and approach First Direct for a quote. I'm not in a position to wait for my 26th birthday, however I will wait until the two closed CC accounts are shown properly on my credit file. I am having difficulty finding legal T&Cs regarding early repayment though. I am aware that they will be presented when I go through the application, but I wanted to check the terms before getting a full quote. Does early repayment of a loan actually save you interest, or is the balance of the account calculated at the start of the loan and you must pay this back regardless of early payment?

27col

You have not been reading the FAQ's on the Zopa site. If you do, you will find that every thing is very clearly explained. Particularly your question about early repayment. The interest is calculated daily, so if you pay back more then you will pay less interest overall.
The lending rates vary from hour to hour and they will give you the best rate available at the time of your application. They are not lending their money, they our lending the money of people like myself and we have to alter our interest rates in order to get our money lent out. If we want too much interest we will be undercut by others who are prepared to lend for less interest. If our money is not lent out because we want too much interest, then we are getting no interest at all. So it is in the lenders best interest to keep the rates reasonable.
I have just checked the interest rates and Y 36(3 year loan) is 8.4%, Y60(5 year loan) is 9.6%. I say again, read the FAQ's carefully and you will be able to find the answers to your questions fully explained.

tjg04

Thanks for your reply 27col. I was ambiguous in my reply, I actually had difficulty finding the early repayment terms relating to the First Direct loans. I had indeed found the FAQ sections of the Zopa site and have found all the information I need.

tjg04

Given that you can repay your lenders on Zopa early without penalty and the interest is calculated daily, is there anything to prevent you from taking out a loan for a larger amount than you need, to gain a better rate, then immediately repaying the excess cash you borrowed. Effectively giving you a smaller loan at the rate of a higher one?

jamesd

tjg04 wrote: »

My questions are thus: is this rate fairly typical for borrowers in the young category (I'm 25)? Or am I seen as a risk?

At Zopa it doesn't matter how good your personal record is when you're in the young category. You're bundled in with all the others who meet at least the minimum permitted standard.

tjg04 wrote: »

I earn approx £47k per year gross, have approx £1100 outstanding on a 0% barclaycard due to be cleared by June (£3500 limit). I have a cashback AmEx £2000 limit cleared monthly. And a history of various cards and phone contracts dating back to when I was 18, no missed payments or blemishes and no other debt. I rent privately and am on the electoral roll.

It appears that you have a good to excellent personal credit record. Since Zopa largely ignores this when you're in the young market that suggests that you're probably going to do better initially by trying lenders other than those using Zopa.

At the moment there's fairly high demand and relatively low supply at Zopa, since Christmas. It may improve and get you a lower rate if you wait until say after 10PM on Friday 3 February or the same time or later on one of the following week days, avoid the weekends. This date is chosen to wait until after the net batch of end and start of month loan payments has added more money. Money is added weekdays and that process ends in the evening sometime around 10PM or so, making then a particularly good time to be applying.

tjg04 wrote: »

I have two closed credit cards that should be dropping off my file this month, for £5500 and £4500, would this have an adverse effect? They've been closed for a couple of months, but had small positive balances that I was unaware of so have remained on my file.

Cards in credit will make no difference. The available credit would make a slight negative difference that would go away as soon as the cards show up as closed.

tjg04 wrote: »

I'm attracted to Zopa as I can pay back early without penalty

There is actually a penalty of sorts at Zopa but it's not clearly described.

Basics first, every lender is required by law to accept early full or partial overpayments and is allowed to charge a maximum about a month's interest on the money when doing so. Zopa doesn't make that charge.

However, the Zopa APR is calculated by spreading the Zopa fee over the whole term of the loan. For someone who intends to make lots of extra payments and pay the loan off more quickly the effect is that they will have a higher APR than given at the start. This effect applies for all lenders who charge an initial fee. It doesn't apply to any lenders who don't charge an initial fee.

So, for those who will overpay a lot, there's a potential APR benefit from loans that appear more expensive in APR initially compared to those that charge a fee but appear to have a lower APR.

Now, Zopa fee amounts vary depending on the market and how much you're borrowing. Sometimes a fairly small increase or decrease can change the fee significantly, down to as low as £25 sometimes. That can eliminate most of the effect on APR that I've described, just because the fee can become too low for it to make much difference. To find out how the fees vary you can check what Zopa tells you. If it's not £25 try the non-logged in quote and move around on the line for amount borrowed to see whether a shift of £500 or so gets you a lower fee. Sometimes borrowing more can significantly reduce the quoted APR.

tjg04 wrote: »

The rate doesn't seem that great (or am I being overly optimistic?). Would I be better off risking the extra searches on my file and getting a few quotes from more mainstream lenders. In case it matters I've only been with my bank First Direct since June last year.

Try First Direct first. You seem to have an excellent credit record and FD accepting you as a customer also suggests that you have a good record because they can be quite picky about who they accept for accounts. If no joy there tr at least one other mainstream lender.

Cases like yours are always interesting because cases around the seams of when borrowers get treated differently can produce strange results sometimes.

tjg04 wrote: »

Does early repayment of a loan actually save you interest, or is the balance of the account calculated at the start of the loan and you must pay this back regardless of early payment?

Yes, it makes a difference unless you're in the last month of a loan. Worth doing it unless you can get a better savings or investment rate than your loan rate.

Best to phone FD to check about their early repayment terms, probably do charge teh extra month on overpaid money. The lower interest rate will make that a very good deal to what you've been quoted via Zopa.

Declaration of interest: I have a loan via Zopa that's one payment from completing. I've lent via Zopa in the past but am not currently doing so, this could change at any time but seems unlikely to do so in the foreseeable future.

jamesd

tjg04 wrote: »

Given that you can repay your lenders on Zopa early without penalty and the interest is calculated daily, is there anything to prevent you from taking out a loan for a larger amount than you need, to gain a better rate, then immediately repaying the excess cash you borrowed. Effectively giving you a smaller loan at the rate of a higher one?

Nothing directly but you can be caught out. There are three main factors that can catch you out:

1. The Zopa fee part of the APR has a reduced effect on the APR as the loan size increases and decreased effect as it grows, even if the running interest rate is the same. So if you get say 11% as loan rate and that and the Zopa fee doesn't change, any reduction in APR is just because the APR is being spread over more money, it's not really saving you anything.

2. The Zopa fee varies with loan amount. You need to check that the Zopa fee hasn't increased when trying different loan sizes. Sometimes a fairly small change up or down can save a lot of fee money.

3. The cost for each extra £10 of borrowed money increases as loan size increases. For much of last year the effect was fairly small and for some loan sizes it's still fairly small but it can be a bit bigger and could sometimes make it less beneficial to borrow more. The effect of a lower Zopa fee is probably more significant than this.

There's also the chance that at a significantly larger loan size the application may be rejected because of the amount borrowed.

Changing loan size can work really well with mainstream lenders and can work with Zopa, mainly by looking for the amounts where the Zopa fee is lower.

tjg04

Thanks for your advice jamesd. The Zopa website suggests however that the only money Zopa make from me is the arrangement fee, In my case £190, rather than a substantive increase in the rate offered. This amount is added on to the loan amount. i.e. £5000 becomes a £5190 loan and I receive £5000 in my bank account. Unless I'm missing something, any reduction in APR being offered on a larger loan amount will manifest itself as a saving over the course of the loan. This is of course assuming that the arrangement fee remains constant. Indeed zopa have quoted me a rate of 9.6% on a £15190 of credit (£15000 loan + £190 arrangement fee).

jamesd

It's not correct that the only money Zopa makes from you is the arrangement fee. Zopa charges a fee that is normally 1% of the fixed interest rate quoted to you. Zopa charges it to lenders accounts but you're still the one paying it. You can't affect this charge by varying how much you borrow and it's the same for all markets. This fee is disclosed in the lender FAQs and lenders see it on the screen where they set their rates.

Last time I did the calculations Zopa was actually making about 40% of the money paid by a borrower for a median size loan, with only 60% going to the people lending the money. It'll be less than that for a loan of your size and in the best credit markets the cut will be lower in many cases where Zopa has reduced its fee.

You're wrong about a reduction in APR reducing the cost over the loan if the arrangement fee remains constant. It's an effect of the way APRs are calculated for fees on loans, not a real saving for you. To get a real saving you need to either get a lower fee or a lower fixed interest rate. If neither of those changes you're not really saving any money even if the APR goes down.

It's interesting that you're getting quoted a £190 fee on a £15,000 loan. The public Zopa rate check shows a £130 fee for 60 months or £10 for 36 months so you're getting a special high fee deal, presumably based on being in the young market.

In your case with a maximum possible loan size Zopa's cut is smaller than usual. Assuming the rate of 9.6% is the APR, Zopa is getting 1% of the 9.6% plus the fee and the people lending you the money are getting 8.6%. Zopa's cut will be much less than 40% of what you're paying for credit, more like 10.4% of the interest plus the fee, which is roughly equivalent to 0.8% interest on a 36 month loan (don't know your term, used (fee / 3 years) (loan size / 2) approximation ). That makes the Zopa cut about 19% of your total price of credit. That will increase if you make overpayments because the effect of the fixed fee will increase as a portion of the total costs you're paying.