zopa safeguard

princess295

ive got some money for a house deposit but cant buy until next year due to being at uni. i put some money into zopa to try make a little bit more towards the house fund, i knew i would make alot but every little helps. i keep getting emails saying i should switch to the safeguard offer and that money in the non safeguard offer will take a long time to be lent out. ive read the information about the safeguard offer on their website but i dont full understand what is different to the normal zopa lending. if someone could explain it to me id be really greatfull.

ilnf

I am in the same situation as you OP, and not entirely sure of the benefits.

I think the difference is that safeguard gives you a set interest rate rather than you being able to set your (possibly higher) rate yourself. In return, if you have a borrower default, zopa will guarantee your money isn't lost.

They are stating your money may take longer to lend if you don't use safeguard probably because the rate you'd charge would be higher, therefore being less attractive to borrowers.

Anyone please correct me if I've misinterpreted it wrong.

geordie_joe

ilnf wrote: »

Anyone please correct me if I've misinterpreted it wrong.

I don't know anything about zopa, but here's what I would do if i owned/ran it. I will make up figures as I don't know what they are on zopa.

Safeguard - I would set the lender rate at 5% but charge the borrower more and keep the difference for myself. i.e. the lender set rate is 5% I lend it out at 7% and keep the extra 2%.

It would take longer to lend non safeguard money because I would offer safeguarded money to borrowers first. Because with non safeguarded I just get my usual fees, but with safeguarded money I get my usual fees plus the extra 2%.

I ay be completely wrong, but if I was doing that is what I would do.

psychic_teabag

The plus with safeguard is that a provision fund covers any bad debt, so if a borrower fails to pay, you get the money from the fund instead. The downside is that zopa chooses the rates and the markets you lend on - you no longer get any say in the matter. (Just choose 3 or 5 years.) The provision fund is similar to the ratesetter model, though the latter do still allow you to choose your own lending rates.

For taxpayers, the rate from safeguard may be better than you can get with non-safeguard, since you can lend in the riskier markets without the unfavourable tax treatment of bad debt. Non-taxpayers might have been better off without safeguard.

Zopa have prioritised safeguard offers over non-safeguard offers, so money is tending not to go out from non- offers, even if they are lower than zopa's tracker rate.

OP: if you might need the money next year, are you sure you want to be lending for (at least) 3-year terms ?

jamesd

You shouldn't be using Zopa for that purpose and timeline. There are various issues but the biggest one is that some of your borrowers will have trouble repaying and you will be stuck with your money lent but no way to get it back because you can't sell a loan at Zopa when there has been even one late payment. This tied up money is likely to be greater than the amount of interest you've made over your timeline, so you're likely to end up with less in the buying pot, not more. You'll get it eventually but that won't help you when buying.

There's also an ethical issue with the Safeguard offers. The payment into the provision fund is taken as a single initial charge. If you overpay you don't get a reduction in this to reflect the lower amount at risk. If you completely repay you don't get a reduction even though there's no longer any risk at all. And of course you pay interest on this money because it's added to the amount you borrow. It's not a small amount, either, it can be well over £1,000 in the B markets if £15,000 is borrowed.

So just like PPI paid by an initial lump sum, I regard this as an unethical product particularly when the B markets are involved and don't want to do any lending to B when this way of paying is in use. Since there's no way of not lending to B with the Safeguard offer, I don't use the Safeguard offer.

When lending, the Safeguard offer lets Zopa set the rate. You no longer have any control over the rates you get and it's normal for the rates Zopa sets to be below the rates that lenders set in the longer-term markets where lenders do have control over their rates.

ilnf wrote: »

I think the difference is that safeguard gives you a set interest rate rather than you being able to set your (possibly higher) rate yourself. In return, if you have a borrower default, zopa will guarantee your money isn't lost.

Zopa does not guarantee that your money is not lost.

Zopa just estimates how much it thinks will be lost and charges borrowers an up-front fee that they hope will be enough to cover it. Zopa are fairly good at this but in the past they have been as much as 100% out (back in 2008).

The interest rate isn't set. Zopa can change it to a different one for each loan if they like and you won't find out until it's too late to do anything about it.

ilnf wrote: »

They are stating your money may take longer to lend if you don't use safeguard probably because the rate you'd charge would be higher, therefore being less attractive to borrowers.

That's not why. It's taking longer to lend because Zopa are lending from all Safeguard offers, even at more expensive rates, before any non-Safeguard offers. The Safeguard fee shows up in the APR just like higher interest rates, so the APR doesn't look any different to the borrower.