Zopa safeguard - no bad debt = good option?

Bluefunk_2 · 5 May 2013 at 1:39AM

Hi,

First of all, I know many of you must be sick her hearing people ask about P2P lending but I wondered if Zopa's new safeguard scheme changes any of your views?

I'm still trying to figure out how best to use a lump sum I have recently received. I feel reluctant to put a significant amount in a S&S isa right now due to my inexperience with the market. Savings accounts speak for themselves.

A risk with P2P lending has always been bad debt eroding Your interest. Now for a 5 year investment with safeguard (they cover ALL your bad debt) they offer 5.1% APR after fees (minus tax for me = 4%).

Surely now bad debt is not a factor you would describe this as almost a risk-free investment at above 5 year bond/isa rates, or am I missing something fundemental here)

Thanks to in advance,

ctdctd · 5 May 2013 at 7:01AM

You are getting extra interest in return for extra risk.

You can get 3% for a five year fixed rate savings account with an FSCS guarantee if the bank goes bust.

Zopa offer 5.1% for the same period but without the FSCS backing if it all goes wrong.

grey_gym_sock · 5 May 2013 at 7:52AM

bad debt is still a factor. the actual bad debts may be higher than they're allowing for, in which case the safeguard scheme won't cover it all. this could happen either because the economy takes a turn for the worse, resulting in more defaults from borrowers generally, or because zopa's underwriting process is careless.

you might perfectly sensibly think that this makes zopa more attractive. however, it covers the smaller, more random risks (having more defaults than average); but can't fully cover the larger risks.

bowlhead99 · 5 May 2013 at 8:09AM

grey_gym_sock wrote: »

bad debt is still a factor. the actual bad debts may be higher than they're allowing for, in which case the safeguard scheme won't cover it all. this could happen either because the economy takes a turn for the worse, resulting in more defaults from borrowers generally, or because zopa's underwriting process is careless.

you might perfectly sensibly think that this makes zopa more attractive. however, it covers the smaller, more random risks (having more defaults than average); but can't fully cover the larger risks.

True: http://help.zopa.com/customer/portal/articles/1103845-are-there-any-circumstances-when-the-safeguard-will-not-step-in-

As mentioned on their site, any lending not done through the safeguard offer is not covered by the safeguard protection ; and the safeguard protection will not pay out in every circumstance. Basically you are being offered a chance to buy insurance, vs another p2p scheme which doesn't have it. Much like considering whether to insure your car fully comprehensive or just TPFT, you might end up financially better or worse off.

And even if you buy fully comp car insurance it doesn't cover you for driving it while drunk or not in a roadworthy condition. Unfortunately on a p2p site where a middleman selects and lines up the borrowers for you, you can't definitively conclude whether those borrowers are drunks or in a lendworthy condition.

Perelandra · 5 May 2013 at 8:43AM

Monevator's take on the change:

http://monevator.com/zopa-offers-safer-savings-option-for-cautious-savers/

davinfowler · 5 May 2013 at 7:48PM

I think a key difference with safeguard is a difference in the way tax is calculated....

IE, with standard loans if there is a default you lose some of your capital. As this is a loss of capital not income you can't claim the loss against the income you are receiving. This makes the tax on returns worse than you might expect.

With Safeguard you don't lose any capital due to defaults as this is covered by the scheme.

Hence should be a little better mean more money for either Zopa and/or the customer and a shade less for HMRC.

Not a bad thing as the tax treatment of P2P loans seems pretty unfair.

JohnRo · 5 May 2013 at 8:33PM

Ratesetter have had a provision fund since day one covering any and all (so far) loan defaults, their provision fund has covered 100% of bad debt and has grown to around £1million in value to boot. This is Zopa playing catchup to the competition with a similar thing.

amoreou.a · 17 May 2013 at 1:55PM

hi there,
just to put my tuppence in, I have been using ZOPA for some 5 years with a small balance of around 1500 to test the process. I have received an average of over 5% interest in this time and had 0% bad dept/default, which I am quite pleased with. I do not think though that I would risk large sums.
Also, it appears the safeguard is only valuable if there is enough money in its pot to allow for defaults. If a large number of defaults occured at once, i wonder if it would revert to any previous debt resolution proceedings. I am not sure that the term safeguard means safe.

a

jamesd · 19 May 2013 at 12:24PM

Got to laugh at this bit of the Monevator story: 'Some people also liked the idea of lending direct to individuals, and cutting out those “greedy” financial institutions'. It's a great idea, shame about the size of the middle men cut these days.

Did you know that Zopa and the other middle men are likely to be getting half or more of all of the money that a borrower is paying in fees and interest? That's not much cutting out, except a big chunk that could be going to investors instead of middle men.

Lets consider how the Safeguard offer works:

1. Zopa sets the loan interest rates.
2. Zopa sets the initial fee it uses to let it and other middle men take an initial cut that is added to the money that is borrowed. It varies these at any time it likes.
3. Zopa charges investors 1% of the amount outstanding.
4. So far as I know Zopa does not disclose the total cuts it gets or other middle men get. Since Zopa can decide its fee and then pass on the cost of the increase to investors in lower interest rates, without now becoming uncompetitive on APR in best buy tables, want to bet on how long it'll still have a 0 fee for some loans? If only it was easy to watch and track this...
5. Zopa doesn't disclose which interest rates it uses, but since it's saying average rates not average of best rates, it's probably something silly like 0.1% from major bank savings rates instead of what a sensible saver would get if they were picking a savings account.

If you check the current levels for popular markets like A* short for say £4,000 you're likely to find that the cut for Zopa and other middle men is more than 50% these days. It'll vary depending on the market, amount borrowed and just when you check.

If you're considering Zopa at only 5.1% and not already using things like the First Direct regular saver that's paying 6% you really need to pay more attention to what else is out there and start to use your money more sensibly. It's also easy to get more than 5% tax free inside a S&S ISA.

The Zopa Safeguard offer could have serious potential if it wasn't so poor on transparency and was tracking best available savings and investment rates, while also being much more transparent about the cut they and other middle men end up with. As it is, it's not a good return and lacks enough transparency to keep the middle men in check.

But it'll still probably attract a lot of money from people who don't do much research into alternatives and just look at the headline rate.

winniethewoo · 18 June 2013 at 3:40PM

Zopa is still worthwhile for diversification. If you have say 10k in savings, its quite wise to loan £5000 to hundreds of small borrowers via something like Zopa and "loan" the remainder to a financial institution by opening a savings account.

One day, interest rates / gilt yields / libor etc will rise. Considering bonds are a major component of bank capital buffers, if the interest rates rise the asset value of these buffer bonds will fall. No one knows what will happen to the banks then. Governments won't be able to afford another round of bailouts.

Government deposit guarantees have never been tested in the UK. No one knows when / how / if at all the government can guarantee and reimburse deposits in failed financial institutions. 6% interest in bank that goes belly up is very poor risk / reward, although its worth keeping some money in a bank to have liquidity.

jamesd · 19 June 2013 at 10:16AM

Government deposit guarantees have been used many times in the UK, notably the Icesave one where the FSCS paid out. There have also been many much smaller payouts, like £89,000 to the members of the Hull East of the River Credit Union. Here's a list of the top ten payouts from the FSCS to customers of investment intermediaries, with payouts from £300 million to £8 million.

So far this year the FSCS has been involved in three payouts, to customers of Carlton Credit Union, Fyshe Horton Finney and Bentley-Leek Financial Management.

It's ever easier to beat the returns available via Zopa and many other P2P firms by using completely standard investments in unit trusts.

I agree with you that diversification can be useful but since I consider it unethical to charge borrowers large up-front fees that don't get refunded if they overpay or repay early, Zopa's Safeguard system is not for me. At least not while I'd have no choice but to lend to people who can be charged more than £1,000 in non-refundable fees if I use it. The non-Safeguard Zopa lending is fine except for the limited returns compared to alternatives.

Zopa safeguard - no bad debt = good option?

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