Confused about Zopa rate

Sayva

Hi, I've been looking into Zopa and I'm a bit confused. I was hoping someone here would be able to answer my question.

Zopa seem to be offering a minimum return of 4.5% gross for a three year investment.

However, I'm a bit confused as it's a loan and not a savings account, I get repayment (capital plus interest) every month.hat does the 4.5% refer to.

Let's say I put in £1000, that 4.5% would equate to £45 a year. However does that apply to the money I invest at the start, or does it assume that I keep re-investing the capital that gets returned as loan payments every month?

i.e if I put in £1000 now will I get £135 minimum after three years if I withdraw every repayment (capital + interest), or do I have to keep reinvesting the capital every month to get 4.5% ?

badger09

It assumes you keep reinvesting the capital as it is repaid.

A bit like a Regular Saver - only in reverse :cool:

Sayva

That's what I thought, otherwise the return would be higher than stated. Is there any kind of formula about anywhere for calculating my return just by lending £x and not reinvesting?

I want to use Zopa as a feeder to my regular savings accounts. So every month when the money is returned, I want to take it out of Zopa and put it into a regular savings account. I'm happy for my money to be "locked away" for 3 years but I don't want to keep locking it away for 3 years indefinitely.

bowlhead99

Sayva wrote: »

However, I'm a bit confused as it's a loan and not a savings account, I get repayment (capital plus interest) every month.hat does the 4.5% refer to.

Let's say I put in £1000, that 4.5% would equate to £45 a year. However does that apply to the money I invest at the start, or does it assume that I keep re-investing the capital that gets returned as loan payments every month?

i.e if I put in £1000 now will I get £135 minimum after three years if I withdraw every repayment (capital + interest), or do I have to keep reinvesting the capital every month to get 4.5% ?

The 4.5% AER that they quote simply means you are getting 4.5% on the money that is actually invested at a point in time. If you put in £1000 but then next month you get £50 back as the person pays off their loan, a small portion of the £50 is the interest on £1000 for one month (about £4) and the rest of it is, say, £46 of your capital coming back to you.

So the next month you only have £954 invested and when you get the next month's £50, the interest component of it will be a bit less than the 'about £4' that it was the first month, and a larger portion will be capital.

In this way, the interest you get goes down as the remaining capital that you have invested goes down, and so you'll never get £45 in a year because you didn't have £1000 invested all year. But you did get an interest rate that would have compounded up to give you £45 per £1000 for every full year.

Sayva wrote: »

Is there any kind of formula about anywhere for calculating my return just by lending £x and not reinvesting?

I want to use Zopa as a feeder to my regular savings accounts. So every month when the money is returned, I want to take it out of Zopa and put it into a regular savings account. I'm happy for my money to be "locked away" for 3 years but I don't want to keep locking it away for 3 years indefinitely.

If the interest rate is 4.5% AER/APR then you are literally getting 4.5% on every pound still outstanding for every day that it's outstanding.

So, if you were looking at dripfeeding a 4.5% AER regular saver account with the receipts from a 4.5% AER Zopa loan, then all of your money would always be earning 4.5%. You stick £1000 into Zopa and start to earn the 4.5% and then when the Zopa money comes back you have the choice to reinvest it at 4.5% or whatever rate they are offering at the time, or reinvest at 4.5% with your regular saver.

In reality, the regular saver won't be the exact same rate as the Zopa rate - for example First Direct is 6%, Nationwide is some number up to 2.5%. The one with the bigger number is where you want your cash to spend most of its time. For most people the absolute amount of pounds they will receive in a year is not the main thing, they just shop around to have as much money as possible invested in the highest rates possible, and the pounds just works itself out, you see it when you look at your total balance at the end compared to the start.

If you wanted to be scientific about it, and you know how to use spreadsheet formulae, you could put the amounts and interest rates into formulas on MS Excel or Openoffice Calc. For a given starting amount, ending amount and interest rate and number of months, formula "PMT()" will give you the total monthly payment that you should receive if you're getting it in flat monthly chunks, while IPMT() gives you the interest component of a particular month's payment and PPMT() gives you the principal piece within a particular month's payment.

However maybe a simpler way to do it is just look at the quotes from Zopa - if they say you can give them £1000 at 4.5% AER and get back 36 monthly payments of £29.71, that's £1069 in total, of which £1000 was your principal so you must have earned £69 of interest over the 3 years. So on a simple average basis, about £23 per year - of course it was more interest per month in the first year with a lot of capital outstanding than it was in the last year when hardly any capital was outstanding. But overall, £69 is your interest.

That would smell about right, because if the headline rate is £45 a year on £1000 invested, and over the three years you start with £1000 invested and end with £0 invested, then on average you could say you only have about £500 invested for the 3 years and should get £45 / 2 x 3 years. Or you could say the £1000 was only really at work for about 1.5 years, so you should get £45 x 1.5, Either way, the £45 a year x 1.5 gets you to about £68, so £69 sounds right to me.

So if you are trying to work out how much actual cash you will receive from Zopa loans you can do the spreadsheet method if you like, or a simple estimate, or look at what Zopa quote you in terms of £x per month for y months and multiply it out to see how much that comes to in total and therefore how much must have been interest.