Have you heard of Zopa? It’s got quite a unique name, it’s been in the press, and it’s been around for a good few years now, but most people I ask don’t know what it is.

Zopa is a peer-to-peer money lending site. What exactly does that mean? Well, it’s about bringing lenders and borrowers directly together. Banks have been doing this themselves for years, but with a huge void in between – you never know what’s happened to your money, only that you get a fixed rate of return, and that someone else is borrowing money, possibly yours. Zopa attempts to cut out this middle man and in return claims better rates for both lenders and borrowers.

What’s the catch? As with any scheme offering you more interest than a high street bank it’s more risky and involves more effort (not a lot, if you want to be lazy, but you can get heavily involved if you want!). By cutting out the middle man the guarantees to lenders are gone. You don’t put your money in for a fixed rate of return and wait for your income to appear. Instead, the rates can vary, and you’re directly exposed to late payments and defaulters (people who don’t pay).

Lets look at how it actually works. There’s two ways to lend on Zopa – the market place and listings. The market place is a place where lenders can offer money to certain categories of borrower (A* to Y, based on credit rating and/or age) at certain rates for a certain period of time (3 or 5 years). Borrowers then apply for loans (I’m not sure on this process because I haven’t done it) and get matched up with lenders by Zopa’s systems.

Zopa allow you to limit your exposure to each borrower. So when setting up your lending offer for the markets you can say to lend a maximum of, for example, £10 to each borrower. When the system matches up a loan for a borrower it has to use the offers from many lenders to build up a package. This is great for lenders since your funds are spread widely, which means if an individual borrower defaults the impact is less than it would be if you’d covered that entire loan yourself.

The other method of lending is called listings. These are more auction like – a borrower puts a listing up and gives details of their financial status and why they want money. Lenders can ask questions (publicly) about these details and can decide whether they want to make an offer. Offers are made for a certain amount at a certain percentage. When enough offers have been made to cover the loan the ones with high percentages start being knocked off the end. As the listing approaches its close lenders often fight to get their offer in at as high a rate as possible, which drives down the average rate (which is what the borrower gets). At the end of all this the borrower can decide whether to accept or not.

Personally I find the listings more fun than the market place, but in the long run the markets offer the best facility for lending. You can set your rates, turn on automatic lending (to automatically reinvest your returns from loans), and leave it to it. Rates would need reviewing on a regular basis, but that’s part of the fun of a system like this.

The next stage for loans from either system is the underwriters. This is the stage where the Zopa staff decide whether to approve the loan or not. They do a whole bunch of stringent checks which result in quite a large number of rejections. Whilst this can be frustrating it’s nice to know someone is taking the time to make the checks to safeguard your money.

Then the money is given to the borrower and the repayment process begins. Over the next 3-5 years (possibly less on listings, where the duration can be as little as 1 year) the money trickles back, including interest. The rates quoted do rely on reinvestment though, so it’s important to reinvest those returns (when they reach £10 blocks) to make maximum use of Zopa.

So what’s left to worry about? Bad debt and defaulters. It’s inevitable that a percentage of the borrowers will fail to pay or disappear. The spreading of money minimises impact, but it still happens. And worryingly the rate at which it’s happening seems to be on the up. Zopa is quite open about these figures, but they do seem to lag on reality, so take the numbers with a pinch of salt. If you stick to the higher end markets the risk is lower, but so are the returns. It’s a balancing act to decide how to set your rates against these risks.

Zopa is becoming increasingly popular of late due to the lower high street savings rates and the increasing difficulty in getting loans. I suspect this means more lenders are getting involved without fully understanding what they’re getting in to. The biggest issue I see is the longevity of the loans. You can’t get your money back for up to 5 years, and the constant recycling of funds means that’s a moving target. It’d be great to see Zopa doing a market place for existing loans where lenders can sell on their current loans, but that’s a whole new ball game, and I don’t expect they’ll do it any time soon.

Personally I’m probably not going to get seriously in to Zopa. It’s fun to play with and see how things go, but for now my savings will remain locked away in low paying savings accounts and ISAs.

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  1. Been good for me so far with a return of just over 10% after fee but before bad debt although return reduced a bit since holding account money stopped earning interest. I think i have been lucky so far as the bad debts are at the same level as the tell a friend rewards i have earnt, so for now i am still investing in zopa although i am constantly amazed at how low some people offer to lend money at and can imagine that a lot of them will never show a profit once the bad debts are accounted for.

  2. I had three bad debts from my Zopa experiment, which on the sum invested was quite significant. But it is not statistically very meaningful, as I made less than 100 loans.

    Interestingly two of the bad debts (maybe the third – I don’t recall for sure) were originated in the very same bad week in October last year.

  3. The problem of late is the tax issue relating to the HMRC ruling on the treatment of bad debts. Like you Tim i have had some great returns from zopa but as my bad debts increase the tax treatment of them is starting to knock the returns.

  4. Edd – good point about the £10 diminishing over time. I hadn’t thought about it that way, although it’d pretty damn obvious 🙂

    From what I’ve read on the forums when the money turns to bad debt you’re unlikely to see any of it. They pass it on to their debt collectors, but I think they say you’ll only get a small percentage back, if anything.

    Still, if you spread widely enough it should help lessen the blow. I guess it’s just easy to get worried by the bad stories others give on the forums…

    Good luck with Zopa, it sounds like you’re doing well!

  5. I just thought I’d follow myself up on this. I’ve noticed a significant improvement in rates recently, so I’m starting to put a bit of money in again. I’m still cautious (in life generally, actually), but I’m enjoying the process.

    I still have concerns over the money being locked away for a minimum of three years. It’d be great to see a loans market, but I’m not really sure how that’d work.

  6. Edd Turner

    A 10GBP loss would be the result of one particular person not paying back anything at all.

    Lending out 10GBP over 3 years results in pennies a month, so the lender’s failure to pay back would be noticed very early on, before you even lost 10GBP.

    I guess then Zopa would take steps to ensure you got it… (but I don’t know what because it hasn’t happened to me yet).

    I see Zopa as an attractive home for the cash element of my portfolio…

  7. Edd – it’s good to hear of people getting good results. Presumably you pay a lower Zopa fee? I’m nervous of the big dent a bad debt could make. It only takes a few £10 loses to seriously erode any profits.

    Also, when I looked a few weeks ago, rates at the top end were being pushed quite a way down by much more supply than demand.

    It’s definitely a great idea, and I’ll continue to dabble, but for now at least it’ll remain an interesting experiment for me rather than a serious investment vehicle.

  8. Edd Turner

    ‘Personally I’m probably not going to get seriously in to Zopa’

    That’s a shame – why not?

    After nearly 3 years of problem free service I’ve got more than 3x the return of a high street bank and not lost a penny though defaults or bad debt.

    I look forward to the day I can offer up my under-performing SIPP through them…

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