Zopa

Look back through you news server and find the thread started on Monday:

"D Tel: How to borrow £25,000 from a strangeron the internet"

Yes, there are tax implications on making a profit, but I doubt that many people will get this far, I wonder if you can claim a loss?.

tim

It's breathtaking. How stupid do you have to be to lend money like that? I see a BBC Watchdog program about this before long, that's full of stupid people!

These people were featured on Radio 4's Moneybox this morning. Has anyone used them, or have an opinion on them?

Zopa are a kind of financial version of eBay, where you lend to or borrow directly from people, rather than go through a middleman.

The Zopa director interviewed (who happens to be the ex-marketing manager of Egg) seemed to be a bit evasive when asked about their license/authorisation to carry on this kind of business.

The market rate for lending money through them seems to be in the region of 8%. Its a nice idea, but I wonder if the concept is too new and possibly too risky?

Chris

Bitstring , from the wonderful person Chris Blunt said

First rule of Usenet - read before writing. They have been discussed here considerably in the last week or so. If your ISP can't find the threads, Google can.

They seem to be in the business of payment insurance, which reduces the risk, perhaps, but, as recently discussed, increases the borrowing cost.

In message , Chris Blunt wrote

It was established that they are _only_ licensed to sell insurance. They are selling loan protection insurance.

The Zopa director also was a bit vague on the typical borrowing and lending figures. Borrowing seemed to be range 6% to 8% and lending returned a better rate than ING. I wonder if these figures were before or after their 1% commission?

The Zopa director was also a bit vague on bad debts. He said that they would pursue bad debts in the normal industry way. However the risk of non-payment is with the individual lender.

With a large institution the risks of bad dept are shared equally between all customers. With Zopa the risk is only shared with tens or hundreds of other individual lenders .... unless you take out insurance :(

I can see the attraction of doing this but it has some large flaws.

Flaw 1 - is the rate just because you have lent say @8% the actual return is lower as the balance is redeemed by the borrower monthly. In order to achieve a real 8% return you are forced to relend your receivables back on to the exchange.

Secondly, zopa is at the end of the day asking you to become an unlicensed lender. As this is new the agreements have not been tested to any degree. This is very important as if your agreement with the borrower is voided by a court, thats your cash gone. I can only guess but should a borrower run into difficulties & default. The NACAB or local money advice agency will gladly set out to test the validity of zopa's agreements as its removal would better their own clients' position.

Which leads to the biggest flaw unlike a "real lender" you don't know who you are lending to and in the event of borrower default, (and there will be defaults) you are totally reliant on zopa to perform. This is all untested.

Unfortunately zopa cannot require borrowers to take out indemnity cover, though I would suggest they price it into the loans as an opt out rather than opt in. That would give me confidence.

The lack of credit insurance on offer to lenders should give you fair warning, as a potential income earner for zopa what insurance companies have assessed as risk must have led to cover being quoted that was uncompetitive - That means this is viewed as high risk by people who do this for a living.

As you (and others) have said, once investigated this idea sucks big time. ISTM that any interest rate under 20% isn't worth taking the risk, and at that rate I'm not sure that you would want the customers that you will get.

It really is hard to understand why some (apparently) respected people thought that this idea worked at an interest rate of 8% and that the press have reported it with vigor (OK, they are probably just recycling a press release)

tim

Aren't the interest rates set by the lender?

Chris

Yes. The 8% figure was one dreamed up by Zopa as being attractive to both sides, but it isn't.

tim

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 short, 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. As it happens I have 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

In message , Chris Blunt wrote

Yes

People with a good credit rating will obtain loans at a competitive rate elsewhere. Lenders who want higher rates of interest are likely to get high risk borrowers.