Spooked by my bad debts at Zopa

Alas it seems Zopa, the UK peer-to-peer lender, isn’t immune to the downturn – at least not if my recent experience is anything to go by.

Readers may recall I was worried that bad debts would rise at Zopa as far back as March 2008.

My fear was that consumers starved of finance by the credit crunch would get loans at Zopa (which claims to have more rigorous credit checks than the banks) before eventually succumbing to their debts.

Rising interest rates were obviously attractive to Zopa lenders, but did it suggest consumers were more desperate?

This is important because with Zopa, unlike a bank saving account, you can lose your money if your borrowers default.

Do not mistake Zopa for a savings account! Read my earlier article for more on the pros and cons of Zopa.

It seemed like my fears were misplaced as recently as January, when bad debt was still below Zopa’s projections. I’d not seen any bad debts!

But in the past few weeks two of my late payers have officially been written off as bad debts. That’s out of the 100 minimum-sized loans I’ve originated, and it represents 17% of my earnings to date from lending, though less than 2% of my initial Zopa ‘pot’.

Interestingly, both loans were written within a few days of each other in July 2008, which seems a slight coincidence.

Both were B market loans, which represents by far the smallest amount of my lending – I generally stick to A and A* lending – and both loans were at rates of 9.5%. I have another late payment pending, which is from the A market.

Perhaps I’m being premature here, but these two late payments have spooked me into withdrawing my open lending offers.

I still have a few hundred quid out with borrowers, some of which is on three year terms, so quitting the Zopa game entirely isn’t possible.

That’s one reason why I only every invested a small sum of money to begin with.

Zopa remains an interesting experiment

I’ve written before that for me Zopa is a brave and exciting innovation, rather than a direct replacement for cash savings.

While I’m definitely not an advisor, I’ve always said that for me only a small amount money should be put into the system. Suggestions in some quarters that savers put tens of thousands of pounds in due to falling interest rates on cash deposits elsewhere have frankly worried me. This is not yet a proven home for a significant percentage of the average household’s wealth.

Nothing has changed in that sense. With the stock market still low I’m happier risking the money I’ve withdrawn from Zopa in an index tracker or similar, but I’m equally happy to watch the Zopa experiment unfold.

Besides the risk of losing a lot of capital – something I still feel is unlikely, despite my recent bad luck – there are problems with Zopa that I feel are less well-appreciated. (Some people don’t appreciate even the risk to capital, having said that!)

In particular borrowers can repay loans at any time without penalty. This is terrible from a lender’s point of view because it skews the risk/reward, and opens up a theoretical tendency for better prospects to pay up and exit their loans while poorer ones accumulate.

It also means you can’t lock in interest rates, as you can with bonds, because borrowers can repay their Zopa loan when cheaper rates become available.

Another problem is liquidity. Unlike borrowers who enjoy flexible repayments, investors must wait until a loan is closed to get that tranche of money back.

Interesting times for Zopa lenders

I should stress that as far as I know there’s been no official news that bad debts have jumped at Zopa, although some posters in the Zopa community seem a little more worried, too. On member comments:

I may have started all this on bad debt last November when I had four late payers. Well I have now one bad debt and five late payers.

I have been reading all the comments and Members trying to work out bad debt figures etc. most of which, sadly, I do not understand. BUT why doesn’t Zopa management intervene and come up with some true calculations from their point of view! I cannot afford to lose money (and yes I know there was a risk!) so I am taking money out when I can and not reinvesting (originally £5,000). Hopefully at the end I will be able to ascertain whether it was worth it!

I’m not the only one getting spooked it seems, although whether this is statistically significant is another matter altogether – the very nature of Zopa is some lenders may get more bad debts than others through sheer bad luck.

Anyway, my remaining loans notwithstanding, I’ll be watching what happens to Zopa increasingly from the sidelines for now.