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Bad debts are rising at Zopa

Bad debts are rising at Zopa, the lending website.

I have now seen a third debt go ‘bad’ at Zopa, the peer-to-peer lender. This time it was in the A market, whereas my previous two bad debts at Zopa were from the B market.

To be clear, when I say ‘bad’ I mean the debt was written off.

All my Zopa loans are just £10 in size, which means the impact isn’t too great.

The money thief bad debtor was even kind enough to pay back £1.24 of my hard-earned cash before he decided he’d paid enough.

Nonetheless, this new evil sponger bad debtor brings my total losses to £26.81. I put £1,000 into Zopa in total, which means my bad debt has now hit 2.68%.

Quite a chunk!

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

Interestingly, all loans that went bad were made within a month of each other, in late summer 2008. The rates achievable were higher then, too.

Perhaps more desperate people than usual were coming to Zopa then? Or maybe there was some blip in Zopa’s credit control at that time – I am just speculating, and certainly have no evidence except my own data.

I do feel three bad debts in such a short period is at the least unlucky when I’ve invested only in the safer markets, but again it’s statistically meaningless.

However, Zopa said last month it has seen write-offs rise slightly, and it emailed us lenders accordingly. It has also created new pages to help lenders understand bad debts.

The Zopa email said amongst other things:

We publish expected bad debt rates so that lenders can take account of future losses when setting their interest rates. The new analysis shows that despite very low historical levels of default, we’ve seen those levels starting to rise in line with our expectations over time.

More recently however, we’ve also seen a lower than expected recovery of arrears in certain markets. So while our data samples remain small and conclusions are therefore less clear-cut, we’ve decided to increase our forecasts of bad debt for three of the markets.

Two of the markets affected are C markets, which I don’t invest in. However the other one where Zopa is modifying its expectations is the 36-month A market, which was where my recent bad debt originated:

Market Previous Annual Expected Bad Debt Rate Previous Lifetime Expected Bad Debt Rate New Annual Expected Bad Debt Rate New Lifetime Expected Bad Debt Rate
A36 0.9% 1.4% 1.0% 1.6%
C36 3.8% 6.0% 5.2% 8.2%
C60 3.1% 8.0% 4.2% 11.0%

(I hope this table from Zopa shows okay on all browsers – please leave a message in the comments if it doesn’t!)

Zopa recently announced it had hit 300,000 members. That’s great – I just hope they’re all aware of the risks.

To be clear, I’m certainly not cross with Zopa at this stage. I think it is a bold experiment and that Zopa is worth trying if you’re a money geek, you know what you’re doing, and/or you can afford to lose some of your investment. But it’s still unproven at this stage, so don’t go crazy.

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{ 13 comments… add one }
  • 1 ZopaSarah August 5, 2009, 12:19 pm

    It’s really interesting to read your regular updates. I’m glad our recent additions to the bad debt info has been useful. We obviously keep a close eye on this side of the business…

  • 2 The Investor August 5, 2009, 1:29 pm

    @ZopaSarah – Thanks for stopping by, and very glad you see some merit in the posts. It’s great to see you guys taking such an active interest in what people are finding with Zopa. 🙂

  • 3 comptroller August 5, 2009, 2:33 pm

    Monevator really ought to get a grip, or perhaps s/he is not as sophisticated as s/he believes. Using emotive words to describe a financial transaction is a sure sign of niavety and if they didn’t understand that the extra return came with added risk well………

  • 4 Niklas Smith August 5, 2009, 4:58 pm

    I’ve put in £2000 into Zopa, and earned £131 in interest so far. Of that, two £10 loans have gone bad but three are in collections and another three have been renegotiated with lower payments. I’ve stopped lending on the listings (the source of one of my defaults and two of the loans in collections despite being about 10% of my total lending). I’ve also more or less entirely stopped lending in C and Y markets (my rates are deliberately set high).

    Overall I am still very happy with Zopa lending, though you are right that it’s not a savings account!

  • 5 dave August 5, 2009, 10:43 pm

    great site – love the posts.

    just my 2 cents worth on Zopa. I was in from the beginning but dropped out at the end of 2007 when they stopped doing 12 month loans. I could only see a negative in tying up money for 3 years minimum especially when the world was about to end. I had no bad debts during my time and earned a fair amount of interest.

    When I was in Zopa, I found it frustrating though to earn low levels of interest on my money – competition by fools led the Zopa market to price money at about 6% or lower (at a time when the BOE rate was 5.5%) and banks were offering more than that in savings accounts. There was little point to leaving money in Zopa and not earning anything from it. I still check my account from time to time as little drips come in from borrowers but with only a few pounds left to repay there isn’t much in there now.

  • 6 The Investor August 6, 2009, 12:54 am

    Thanks for all the comments everyone.

    @Dave – Yes, when I first started they were still offering the 12 month loans. I agree their departure made the proposition less attractive, especially since borrowers can repay without penalties, so the risk/reward is rather lop-sided.

    @Niklas – I avoided listings from the start, not that it’s helped me relative to you. Good luck with the remaining loans, and thanks for sharing.

    @comptroller – I’m definitely not spectacularly financially sophisticated (please see my disclaimer if you get a moment) but I hope I do realize extra reward comes with extra risk. The point is these were towards the safer end of the lending spectrum, and the bad debts were in excess of what was expected. As I say, statistically not very meaningful given I’m a sample size of one. I still have some 70-odd loans outstanding so we’ll see how they perform. (The emotive words were an attempt at humour. LOL, as the kids say.)

  • 7 alexp August 6, 2009, 7:40 pm

    Hi, I would just point out that you’re obviously right in saying your bad debt percentage has increased, but time has also gone past. Another 3 months. You’re annual bad-debt rate is (by my calculations) approx 1.8%, which is below that expected of the B market. I don’t know what you’re portfolio split is between A*, A and B, but this figure doesn’t seem wildly different to expectations.

    Lenders (of which I am one) are obviously often upset to see bad-debt happen, and to ‘lose money’ by writing off their loans, without realising that this is to be expected, and is why the rates, especially for B and C markets, are so much higher!

    A more interesting and important point is the tax treatment of bad-debt, and the inability to deduct this from income before calculating tax due, an issue that we should be campaigning for HMRC and the Treasury to address as soon as possible.

    Alex

  • 8 The Investor August 6, 2009, 8:26 pm

    @Alexp – Good point about time, I was sloppy. I agree I should factor it consistently into my thinking. (To be fair I’ve only ever tried to position these posts as ‘gut feel’ – e.g. my last update said I was ’spooked’ by bad debts).

    In terms of my portfolio (and this isn’t any kind of criticism since as you say you obviously couldn’t know) I have been overwhelmingly in the A and A* markets.

    Update: Okay, I just went and looked! I have written 69 A* loans, 37 A loans and 18 B loans. Five B loans were closed early with full repayment. So 11.1% of the B loans I wrote in total went bad, or 15.4% of the loans that weren’t closed early. (I’m pulling those out like that because as far as I can see that’s all downside for the lender, who has taken the risk without extra reward when the borrower decides to repay early).

    Those numbers are very big – but as I said in my post clearly statistically meaningless, since two more or less bad debts of the mere 18 written would change everything again. I’ve been unlucky.

    Thanks for your thoughts, much appreciated.

  • 9 Zopadog April 23, 2010, 2:46 am

    I aimed towards a 11 to 9% interrest rate, I put some 1000 in listings but soon realised not to cary on with them. Then I put 3200 in markets mostly in A 60 B 60. I tried to offset my listing by lending cheap on A*36 and 60 market. In year and a half I have got 460 with 37 bad debt. My lending rate is low but I am not too pushed about it. I did get lucky with my listings(at one time I had Bdebts of 150+) at the sometime I really read into each borrower’s statement and saw who made more of an effort, their ratings and most of all their answers. I think we all pay a price one way or another with the banks, but with zopa we have a little more control and transparency. Its not easy but with a patience I think any one can get an okay return. And I know its hard but I enjoy how it works. I look at zopa returns capital+interest as a fall back in income and you know you can’t spend your savings over night.

  • 10 Ben August 9, 2011, 10:03 am

    i’ve had a little flutter with zopa since oct last year

    I too have suffered bad debts and seen interest rates fall

    All in all I’m not convinced with it – too much hassle for not enough return for the passive kind of guy

    has anyone *ever* got any money back after the debt collectors have been called in? I would assume that the 3rd party repo-company see to it that all monies collected by the heavies breaking down the door get swallowed up in fees.

    Whilst initially excited by the idea of Zopa, I’ve found the returns too tight and the hassles to high

  • 11 Monevator August 12, 2011, 7:13 am

    @Ben – Interesting question. You could try asking on the Zopa discussion boards, they’re pretty busy.

    I had too many bad debts for my liking, too, but worth realising this is what you’d expect to happen with atomised lender/borrower relationships.

    i.e. When Lloyds takes a writedown the pain is very widely spread across all its stakeholders. With Zopa, where there’s spectacularly less risk-spreading compared to a High Street bank (as well as no FSA guarantee, in case any novices are reading!), inevitably some people are going to be hit by more painful debts.

    Its statistics and the business model, rather than a flaw as such. We’ve just been unlucky I guess!

  • 12 Ben September 9, 2011, 1:15 pm

    i’ve had a chat with some of the guys on the zopa forum

    general consensus is that you should use your tax free wrappers up 1st as theres very little difference in return, in fact ZOPA would prob be worse if you’re a higher rate tax payer – with the additional risk you could get more bad debt than you expect and theres no FCS protection

    but if you’re still looking for something after stuffing your ISA/SIPP then maybe its an option….

    I’ve decided to ditch it as its too much hassle and I have enough difficulty using up my ISA subscriptions as it is so theres not much left to play around with

  • 13 Ben January 31, 2012, 12:41 pm

    zopa update:

    just received an email from zopa as follows:

    ‘Why leave money in a low interest savings account when you could just throw it away? It’s quicker and easier. Many accounts offer under 1% – losing you money every day.

    Zopa has a simpler solution: put your money in; start lending and earn an inflation-beating 5.4% after fee and expected default.’

    5.4% before tax, no FCS protection and a min of 3 year commitment. Its no better than a best buy ISA for a lower rate tax payer, even worse if your a higher rate…

    Its sunk firmly into the ‘barge-pole’ category for me, I struggle to understand how they are achieving their growth figures? Who is putting their money there? At very best there can only be a very miche market of people who might just be able to scrape a few more basis points using zopa…

    doesn’t add up

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