Zopa Loans

Revised: November 2010

When I first wrote this opinion inflation was zero (allegedly). Unfortunately this news didn’t seem to have percolated through to my house insurers, and neither had it, when the time came for my car insurance to plop onto my mat.

Coupled with savings, even those in tax-free Cash ISAs earning what is known in the financial world as‘****-all’, the pressure on income was and still is clearly downwards whilst the prospect of zero inflation would appear to have been only in the heads of those that calculated it. Worse still, back in the present day, the RPI and the CPI (that’s the new way of screwing pensioners down to lower pay rises) stand head and shoulders above what you can expect to earn in the average building society savings account.

It was whilst reviewing what my various savings were earning that I hunted around for something a bit more ‘interesting’ (pun intended for once) in which to invest further savings. Note that; ‘further savings’. I’m not adventurous or silly enough to start swapping them over. It didn’t help that The Nationwide were almost self-congratulatory that they’d managed to pay me a princely £16 p.a. ‘tax free’ from £7,000 – is it me or is that about 0.25%?

It was in the ‘money pages’ of some broadsheet Sunday paper that I first read about ZOPA – Zone Of Personal Agreement. I think the phrase ‘in glowing terms’ applies.

In a nutshell, it’s an on-line dating agency for lenders and borrowers which has been going now for a few years. However, if that all sounds a bit scary to a potential lender it isn’t for several reasons. I can’t see any reason why a borrower would find it scary either, unless of course they find out something they didn’t want to hear, like their credit’s no good.

Like all lending organisations, there’s a slight difference between the interest rate being offered to borrowers and the net amount paid out to investors, so no change there you might think! This difference is Zopa’s very modest fee for handling the process, which includes very stringent credit checks (way better than the banks WERE doing, although they may now be taking the hint), chasing late payments and eventually defaulters through the usual legal channels, and operating profit to run the service. Some of the other opinions I’ve seen written ‘elsewhere’ relate to borrowers who, having tried to get a loan are less than enthusiastic having been turned down – well sorry, but Zopa can be as careful with my money as they like.

Borrowers are graded into risk categories, ranging from A+ to C, with a special category (Y) for young borrowers yet to gain any credit history. Thus, the interest charged is dependant on the outcome of credit checking prior to offers being made. Obviously C and Y are charged more, whilst the A+s get the cream of the crop. I can only assume from the number of A+ borrowers on Zopa’s books that their loan rates are still competitive compared to those being offered by banks. Some borrowers have even been asked to present themselves at Zopa’s offices with proof of address, earnings etc.

Another reason that it isn’t scary, especially if you stick to ‘default settings’, is that the most you ever loan one person is £10, thus for my £500 trial investment, I played Shylock to 50 Merchants of Venice. Actual loans are made up of composite offers from quite possibly hundreds of lenders. Therefore with a documented default rate of only 0.28%, there’s no chance you’ll be the lender who cops for the whole loss, and in any case, not all defaulters do it on ‘day one’ having paid some of the loan off first.

BUT WHAT OF THE REWARDS, LAD?

Well, I’m now 20 months down the line since lobbing in £500, this has grown, albeit it shakily to start with to £552, but bear in mind that the first month is a ‘dead month’ as far as income is concerned, (and come to think of it, the second month is pretty quiet too) so I’m really looking at more like 18 months’ profit, and I think anyone earning about £36 per annum from their £500 would be quite pleased with 7.2% these days. Admittedly, this is pre-tax, but even so, it compares very favourably with any Cash ISAS that I know of.

The delay in getting started can mostly be put down to the fact that a lot of borrowers sign up, and then push their first payment date as far into the next month as possible, making the prospect of nearly a two month wait for any action.

However, Zopa are wise to this and charge them accordingly for their first payment. I have opted for 36-month loans, and so each month, I get 1/36th of my £500 back plus interest, the two amounts being separated out on Zopa’s excellent web site, although, if you opt to ‘auto-lend’, which I have done, anything in my holding account, capital and interest combined, gets ‘re-lent’ as soon as it reaches £10.

If you don’t auto-lend, you can choose what you want done with the money in your holding account. This could include having it all sent to your bank account, or using only part of it to re-offer £10 into the loan system. Of course, if you opt to have it all back as and when it arrives, you have to bear in mind that this will only last 36 months (or 12 or 60, depending on which ‘market’ you have joined).

My own strategy if you can call it that, having satisfied myself that this is £500 I can do without, is to grow it for the full initial term, and then start taking income from it, leaving just enough to recycle back into it to keep the current of lending level up. January 2011 - I've now added another £50 to my original money injection. Curiously, because of the hiatus this causes in finding borrowers for 5 more £10 loan segments, this has caused my progress to drop back half a %age point, but of course it's purely temporary. Next month I've got 93 investors all due to give me 1/36th of £10 (plus interest) This should now give me the 'critical mass' to add 3 borrowers a month, every month, not the 'sometimes 2, sometimes 3' as at present.

Don’t put money in that you’ll want back at any moment – you can’t have it, except in 36 instalments although Zopa have now come up with a scheme, whereby your loans can be 'sold on' at a loss of interest to you, so my advice to only play with money you don't want for 3 years still holds true.

SIGNING UP

Ironically, this seems to be as stringent for lenders as it is for borrowers. I had to confirm the details of loans and credit cards against my name (at Experian, no doubt), although it was more by luck than judgement that I correctly identified my car loan, which was lent by a company I’d never heard of, but which matched my SEAT car loan exactly - it’s a pity that my loan agreement only shows this as VAG Finance, and not the real lenders.

Your first bank transfer takes about three business days to clear above and beyond the usual process, so don’t be impatient.

Finally, you get to lend the money. Of course, you can dive straight into the money market and lend to specific requests for a loan, but there’s always the spectre of the borrower being one of the 0.28% defaulters to scare you off! I’d also steer clear of borrowers who state ‘Consolidation of existing debt’ as a reason for the loan – where’s the proof that they’ve cut up their credit cards? Also, as with ‘wheeling and dealing’ with stocks and shares, this requires a good deal of micro-management with frequent visits to the www.zopa.com web site, at least in its infancy.

For myself, I preferred a more hands-off approach, letting Zopa split my money into £10 chunks and adding it to their stockpile of money on offer to a split of borrowers across the whole risk/borrowing rate spectrum.

At month 20, I had lent to 53 A+ borrowers at 7.00%, 29 A’s at 7.51%, 10 Bs at 8.46%, 3 Cs at 9.90% and 4 Y’s at 9.95%.

You’ll notice that this adds up to 99 borrowers, not the 85 I really had at the time. This is because many chose to repay their loan early in full (won the lottery?) allowing me to recycle the loan.

You’ll also notice that the spread is cautious with the majority lent to good risks at lower rates. I didn’t want to be greedy and run the greater risk of defaulters, but those prepared to spend more time on the site might be able to make more profits this way. After all, the web site front page does state that in the last 12 months, their lenders have earned on average 8.1%.

Have I had any defaulters? Not exactly, but I’ve occasionally had late payments. However, Zopa report on anything the slightest bit late, and so far, all late payments have come good after a few days. (January 2011 - still true)

USING THE WEB SITE

Security is pretty good – well, they ask the same kinds of questions that an on-line bank would if that’s anything to go by.

As well as the usual log-on ID and password, you have to answer one of three security questions which rotate on a regular basis.

The usual ‘padlock’ certifies that this is a recognised secure site, as does the URL which turns to being a ‘https’ site as soon as you try to log on.

I purposely set up a new GMail e-mail address for use by this site, and in 18 months, I haven’t received one single item of spam, just their weekly newsletter which is useful if you want to take the totally hands-free approach such as I am at the moment. Of course, you’d want to be a bit more hands-on if your weren’t automatically recycling profits into more loans, as you’d need to visit the site to access your money transfers back to your bank account, but the newsletter is nonetheless very useful and like all good e-mails, it NEVER provides you with a log-on link.

I can only speak as a lender, but the amount of information provided is second to none.

In checking my ‘Loan Book’, the term alone making me feel even more like Shylock, I can split my offerings several ways.

I can split them by payment date so as to estimate when I can expect income.

I can split them by status, so that I can see how many have been paid in full, how many are awaiting approval and more importantly how many are in full swing.

As you’ll already have seen, I can split them by credit rating.

PROS AND CONS

You may personally suffer from defaulters – however, Zopa chase late payments and even help pursuer total defaulters. Having said that, thanks to Zopa’s nit-picking stringency, the default rate is something that banks can only dream of, even if it is what they should have been striving for all along.

Currently, the Inland Revenue only want to know about interest paid – they’re not interested in how much Zopa have charged you or how much default you have suffered. Zopa are currently defending their corner on this issue, as it seems a little unfair not to tax the actual financial gain.

Unlike money put into the bank or building society, you can’t have it all back at once, only in monthly instalments. (well, you can, but it'll costya!)

Thanks to Zopa’s low overheads, (one web site and one fairly modest office in London) interest rates are way beyond what you can reliably achieve elsewhere.

There’s a lively on-site forum where you can ‘chat’ with all kinds of investors and borrowers, getting most of your questions answered in minutes usually.

CONCLUSION

A useful addition to any varied ‘portfolio’ (ooh ‘ark at ‘im – portfolio indeed!), but for my own purposes, it’ll remain just that until I’m happy that I’ve had at least £550 back.

Will I put any more money in? Yes, but only windfalls, like every time I remember to claim my cash-back from Carphonewhorehouse! (January 2011 - I did!)