New lending/borrowing organisation...

Oops...my mistake...the 1% is charged to the borrowers, not the lenders. I guess the same question still applies though regardling risk/return judgements...

RM

Hmmmm - so what happens when there are more borrowers, then lenders? Presumably the thing just runs out of steam and then the whole thing stops?

Supply and demand, I suppose - more people wanting money than supplying it = rates increase, until equilibrium is established again.

Methinks that early adopter may be able to get better rates of return while there's a scarcity of lenders (although they have already lined up some large lenders to kick-start their operations).

Of course...we know little about this company at present except what they wish to tell us on their website and what's been said about them in the media recently so the early adopters are taking a bigger risk and probably deserve a better rate for placing their faith in the venture early on.

RM

A couple of observations:

1. The ZOPA exec team As it happens, I have worked closely with a few of these guys in the past and have absolute faith in their probity. They are extremely intelligent and do genuinely have the customer's best interests at heart. On the other hand, at least 2 of them (Richard Duvall and Sarah Matthews) were driving forces behind Egg's disastrous French market entry strategy...

1. The ZOPA propositions (a) for borrowers I have been a ZOPA member for only a couple of days, but I have to say that even though I have a good credit rating, there doesn't seem to be much money in the 'A' market - only a grand available each day so far - and at terrible rates. I mean, as it happens I just borrowed 20k from Abbey to convert my loft. I got the money at 5.8%; the best rate on ZOPA is 8.6%. They're going to have to do a lot better than that !

It strikes me that ZOPA will attract a lot of stealth sub-prime business (i.e. people who have recently got themselves into difficulties but haven't yet damaged their credit ratings).

(b) for lenders Frankly, the lending proposition is a stinker. Here's why I think so:

Let's assume you have £1000 you're happy to tie up for 12 months. The best 12-month fixed rate I can find today on

is 5.31% gross from the Bristol & West building society. This means you'll get £5.31 as a non-taxpayer, £42.48 if you pay tax at the basic rate and £31.86 at the highest rate of tax. At effectively no risk...

At ZOPA by contrast, you're going to have to price in the risk of a completely unknown book.

Let's assume that instead of putting your grand in the B&W you do decide to lend it out via ZOPA. They parcel it up into at least 50 loans, in this case of £20 each.

As I said above, I think they may be very attractive to the stealth sub-prime market, but let's be kind to ZOPA and assume that your bad debt rate is 2% (i.e. only 1 of the 50 people fails to pay back the money you lent them).

Let's further assume that ZOPA's debt recovery people are super cheap and efficient and get back half your value (by no means a given !).

So at the end of the day you'd be looking at a sundry loss of £10.

As a non-taxpayer, you now have to charge 6.31% to cover that risk; a basic-rate taxpayer needs to charge 6.56% and for the higher-rate taxpayer it rises to 6.98%. So right away, just to break even, you're uncompetitive to the commercial market.

Can't see why anyone but a sub-prime specialist would be brave enough to venture in...

Nick

wrote

This means you'll get 5.31 as a non-taxpayer, 42.48 if you pay tax at the basic rate and 31.86 at the highest rate of tax. At effectively no risk...

** You will once you place the money, but you get nothing until then. Also, the loan is being repaid, so you will get your 1000 back steadily and have to re-lend the revenue promptly to get a steady income off the whole of it.

Let's further assume that ZOPA's debt recovery people are super cheap and efficient and get back half your value (by no means a given !).

** ISTR that they plan to sell bad debt for --20%-- of its face value!

"John Redman" wrote

I'm sure that Bristol & West B/S aren't *that* slow at accepting your dosh!