I see the peer-to-peer pioneer Zopa has evolved again, with the company introducing “Safeguard”, a new and arguably safer way to lend money.
Hitherto Zopa has worked by matching individual lenders and borrowers in a marketplace. You set the interest rate you’ll accept on your loans, and Zopa pairs your savings up with borrowers (or vice versa).
The main benefit of lending via Zopa has been higher rates than you’d get with a bank. Some people also liked the idea of lending direct to individuals, and cutting out those “greedy” financial institutions.
The downside of Zopa was if a loan soured and your smiling borrower turned into a feckless defaulter, then you lost most or all of the money that you’d lent them.
The default option
Your main protection against default has hitherto been Zopa’s usually excellent credit checking, which has kept bad debt well below the predicted levels (though I suffered when it seemingly went on the blink for a month a few years ago).
In addition, you can spread your money between very many borrowers – perhaps lending as little as £10 to any one individual – in order to reduce the impact of any single borrower doing a runner to Gibraltar.
With a fairly large pot of money and typical luck, you could enjoy a healthy average annual return, after deducting fees and bad debts.
Money lent with Zopa is not guaranteed by the Financial Services Compensation Scheme (FSCS) however, and defaults can and do happen, with cash-sapping results. And just to add insult to injury, the way that Zopa interest is taxed, you’re unable to set these bad loans off against your taxable interest income.
So bad debts didn’t even give you the small mercy of a slightly lower tax bill for your troubles.
Bailing out your DIY bank
Zopa’s new ‘Safeguard’ option radically changes this traditional Zopa model, if we can use the word traditional about a seven-year old service!
First and foremost, Zopa claims you will be reimbursed if any of your loans go sour. This will be done via a special fund held in trust for the sole purpose of returning money owed to savers if their borrowers default.
At a stroke, the bad debt problem largely goes away (at least so long as the compensation fund isn’t overwhelmed by bad loans due to some sort of unlikely systemic failure).
The second big change with Safeguard is that if you lend money via the new system, you no longer set a rate you’ll accept for your money.
Instead, all the money goes into the one Safeguard pot that Zopa bundles up to create loans for new borrowers. For some reason this Safeguard money has been prioritised by Zopa for lending, too, so you should see it lent out very quickly.
The interest rate you get for each microloan via Safeguard is determined by a changing tracker rate.
Zopa says it will adjust this rate by looking at:
- The rates being set in its own market
- The rates competitors charge for loans
- Average savings rates
You’ll likely get different rates across the micro-loans you parcel out via Safeguard. Overall though, your average rate should be in line with what Zopa is predicting – which as I type is 5.1% for shorter term loans.1
The advantage should be that Zopa will be able to fulfil loans more quickly, especially larger loans. This may enable Zopa to feature more prominently on financial comparison tables for a wider range of loan bands, and so drive more borrowers to the Zopa site.
Currently Zopa has a problem where it seems to have a lot of savers but perhaps too few borrowers, considering how competitive it should be given the cheaper loans it usually offers.
You don’t get something for nothing
The immediate disadvantage of using Safeguard is you no longer have any control over the rate you get.
Also, as I see it the rates on offer via Safeguard will likely be lower than might have been available in the usual Zopa market for two reasons:
- Firstly, some of your return goes to fund Safeguard’s reimbursement war chest
- Secondly, bank interest rates are lower than you’ve been able to get via Zopa, and the Safeguard tracker rate will follow them down
I think there are likely to be long-term consequences from this shift in the peer-to-peer model, too.
Experimenting with Safeguard
On the face of it, the introduction of Safeguard is good news from Zopa.
It’s always annoying when disproportionate bad luck means an overall poor result, so spreading bad debt across an entire constituency of savers – just as you do when you put money into a normal bank – will be welcomed by all but the most masochistic.
However as my last sentence implies, this move also makes Zopa more like a standard bank in my opinion – only without the nailed-on guarantee on your savings from the FSCS (Cyprus-style deposit raids notwithstanding!)
Safeguard represents more of a fire-and-forget approach to lending money. If it becomes the usual way to lend with Zopa, then this will hit those who’ve enjoyed ‘gaming’ Zopa for an extra 1-2% in interest. I suspect it will also reduce the community feel over time, too.
As an experiment I’ve shifted some of my Zopa savings to a Safeguard offer to target shorter-term loans, and the money is being lent out very rapidly. A third of it has been lent out in barely two hours!
Lending via Safeguard is trivially easy:
Being a greedy money lender couldn’t be easier with Zopa’s Safeguard option!
Against my expectations, the rate I’m receiving today for most of the latest micro-loans I’m making via Safeguard is actually higher than I was getting yesterday in the normal Zopa marketplace
I wonder though if this is just because the pool of money sitting in the Safeguard pot is still relatively small.
Safety first at Zopa?
It’s anyone’s guess, but I expect Safeguard to eventually become the main method of lending money via Zopa.
Having any bad debts repaid will be just too attractive for most people to resist, even if theoretically they might have done slightly better taking the odd hit but getting higher rates to compensate.
Zopa has been getting simpler and simpler (dare I say dumbing down?) for years. It scrapped its high-risk “C” marketplace and its “Y market” that provided loans to young people, for instance, and it reduced the term options for lenders to “shorter” and “longer”, in place of specific terms measured in years.
I didn’t find those changes detrimental, personally, but the result was undeniably a simpler product.
Some changes have been wholly for the good, especially the “Rapid Return” facility that now enables you to get much of your savings money out at short notice if needed, albeit for a charge. Rapid Return partially addressed the imbalance whereby borrowers could repay early, but lenders had to remain locked into their loans.
I think the new Safeguard product will also prove popular with all but the hardcore, but I wonder where it will end.
It will likely suck more savings into the system, and it will likely bring down rates for those borrowers who find their way to Zopa, too.
But arguably Zopa’s problem is one of insufficient scale, which means any emerging imbalances have tended to be addressed by shifts in its operating model.
In theory, its original market-driven rate-setting system should have produced the perfect equilibrium between risk and reward.
But with Safeguard’s tracker rates partly set by competitors and Safeguard savers having to take what they’re given by way of return, the lofty ideals of the early peer-to-peer enthusiasts seem to be further away than ever.
- For all the ins-and-outs about Safeguard, visit the Zopa website.
- Note though that as an early adopter I am only paying a 0.5% lending fee. New lenders will pay a 1% fee, which will reduce this predicted rate by another 0.5%. [↩]
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I’d imagine almost everyone would be better off using it for tax reasons alone. It also makes it almost no maintenance, which is important.
I have a very small amount in a Zopa account. when I first set it up, I checked it all the time and adjusted the rates carefully. I even took part in a ‘listing’ getting in at the best possible rate for that person. Then, once the novelty wore off I realised that all this tinkering was probably working out at 10p an hour. I still check it every so often to see if my anomalously large number of late or defaulted people have paid up, but again, that’s not exactly good use of my time.
Their new innovation gets rid of all that, which makes it less personal, but to be honest, who really cares what the person borrowing is called and it stops silly obsessing over tiny details…
This article came at such perfect timing. I’m on annual leave.. and my task for today is reallocation. I’m heavily pivoted towards the FTSE100 and I want to correct for this sector (financials, mining) and overall equity bias. I looked into Zopa a few years ago but gave it a miss. On reflection now though, it’s a great diversifier for some of my out-of-ISA portfolio. I only hope that I originally signed up through your link, if so you can enjoy a very expensive drink on me 🙂
Right, all my experimental money has gone out through Safeguard already, just this morning. I’ve never had Zopa money go out so quickly. (Well, it’s in “processing” and some will come back if the lender fails credit checks, but you get the gist).
Here’s the results:
I was lending just yesterday in the A markets at 5.4%, so this doesn’t look bad to me though I haven’t yet had a chance to average the results.
I was just reading this and thinking which is safer:
– having money in a bank or in gilts getting 2-3% per year and losing money each year because of inflation
– lending money with Zopa or something similar and getting a little more than inflation back with the risk that some of them will default
Neither seems to offer much chance of a real return over inflation to me
These are strange times we are in now indeed
The UK has a trillion pound government debt and personal debt is close to its highest ever level, but there are no rewards for savers 🙁
I’m with Neverland on this. At least the risk with a conventional savings product is clear and in plain view – it falls behind inflation and will do for the foreseeeable future. But you can get a FSCS guarantee on your nominal amount.
Somehow the Zopa model has more in tune with the stock market- you are putting up venture capital in the hope that people use it responsibly to get themselves out of the crap or build a better business. And there’s no protection on the nominal amount.
There’s little point in lending money to individuals for personal finance who can’t understand Micawber’s rule and spend it on consumables. So presumably Zopa’s screening eliminates most of the people who want to borrow because they must. have. it. now. Indeed the whole lending capital out to lots of places and accepting some will go bad sounds an awful lot like an index fund in some ways 😉
Mind you, I have a special reason to be sore at Zopa. A while ago the buggers would lend me money, which I have no desire to do, but wouldn’t accept money from me. The concept of being a bad debit risk is totally new to me.
if theres a 1/500 defaulter–i will find it (:>(
I’m not entirely sure it’s innovative – isn’t this exactly the same as the RateSetter provision fund?
I suspect that many of your thoughts on this (faster processing, a change in the dynamics of the slightly OTT Zopa community and lower rates) will come to pass.
That said, I’ll be sticking with the ‘traditional’ flavour of Zopa for now, I always wondered how bad losses were for some people that they got up in arms about the tax treatment of their bad debts. For a typical lender with a few thousand lent out, what’s the worst that will realistically happen?
There are better options out there, I have read that Rwanda has just issued a 10 year US$ bond paying……{pauses for dramatic effect}…..
NEARLY SEVEN PER CENT!!!!
:/
@ermine — An interesting theory, but it’s not been born out by my experience with Zopa, where bad debt has stayed very constrained. On a service wide basis the same is true, with bad debts coming in below what Zopa initially projected (although steadily rising, which was apparently expected).
My main fear was of some sort of systemic failure, which back in 2009 I worried had possibly hit the system as the credit crisis worsened. But this fear turned out to be unfounded, and I’d have done well to put more of my cash in Zopa.
You write that there’s “no protection on the nominal amount” but the point of Safeguard is that in normal circumstances, there now is. If Zopa continues as it has in the past, bad debts accrued under Safeguard lending should be reimbursed.
The risk of systemic disaster remains — it would surely overwhelm the Safeguard protection — but having come through the past few years unscathed I think Zopa deserves some credit and this risk seen as reduced.
I wouldn’t argue that it makes sense to still see it as a separate asset class. It’s not at all like the stock market, but it still a bit bond like, albeit safer than it was pre-Safeguard.
I also wouldn’t have any disagreement with someone who said “all that is fair enough, but it’s still FSCS protection for me all the way”. That protection is night and day compared to Safeguard, and elevates cash to prime position (which is why you get 2% on it, currently 🙁 ).
Bad luck on the credit checking, that is truly bizarre! 🙂
I had been looking to put some money into Zopa due to poor rates but I’m not convinced the Media and reports are really giving people a clear picture of what they can expect.
Zopa has a calculator on their site that shows after fees, tax and bad debt the actual rate you will get.
http://uk.zopa.com/help/help-faqs-lending#returns
Its on the above link halfway down the page.
If you put in the highest recommended lending rate on long term B class loans (8.1%) into this calculator is gives an actual final rate of 3.7%. I really don’t think this extra is worth the time/risk n this type of thing.
On a short term A loan at 5.5% the actual return is 3.1%
This is based on basic 20% tax payer and you then need to declare this and pay the tax somehow – self assessment or some other way.
I cant quite believe that even MSE are headlining 8% rates when this really isn’t what you will get. You might better of with corporate bonds in your TAX FREE ISA.
That’s the way i see it….. maybe I’m not 100% right though so feel free to tell me off 😉
@ Neverland
I thought I’d cracked the cash keeping up with inflation safely problem with a credit union, but they’ve slashed their dividend to way below inflation. The underlying issue being too much cash, not enough ‘good’ borrowers. Not really sure what the implications are for P2P.
@ Ermine – “The concept of being a bad debit risk is totally new to me”.
Um yes seems to be a side effect of giving up the day job. I can no longer open savings accounts or investment accounts without presenting my “papers” in person on bended knee.
I think I’ll give Zopa a miss and launder my drugs money* elsewhere, HSBC perhaps?
* joking of course.
@Geo — Hmm, well exclude my own post from your “media” overview as I’ve said nothing about 8% etc… 🙂
I’ve never bothered with the B market. On my most recent lending in the A and A* shorter market earlier this week, I was getting 5.4% pre-tax, bad debt and fees, so at least 3% net to most people (but 3.5% for me because I pay that lower fee due to early adoption. 🙂 )
I think that’s fair compared to the alternatives paying <1% after-tax for a portion of my cash savings, but I agree it's not earth-shattering. Rates have steadily come down as Zopa's popularity has increased.
It's not hard to declare interest income on a self-assessment tax return, I've done it for years, though I'd agree it's possibly worth avoiding Zopa if it means you don't need to start doing so. Self-assessment is a faff compared to not doing it at all.
Remember with Safeguard the bad debt worries go away in all but the worst case, so that will increase the rate payable -- at least until the Safeguard rates are arbitraged down.
I'm not here to persuade anyone though, and I would certainly agree it should be at most part of an asset allocation mix.
I was impressed with how quickly my Safeguard loans went out and the rates I got yesterday and I'm thinking of topping up my Zopa account, but this is a tiny allocation overall compared to my net worth. I have far, far more in some individual shareholdings than I have in Zopa, let along 'proper' savings accounts.
The tax treatment of Peer to Peer lending is awful and so shouldn’t be on any high rate taxpayer’s list of potential investments – stick them in corporate bonds or anything else where losses can be offset against income. At 20% it’s more marginal.
I’ve been lending with Zopa for nearly a year now and not had a single defaulter, so when I heard this news I was sceptical. I felt it might just be a way for Zopa to siphon off some of our money to make it a more secure company, and a bit of a PR boost. However, looking at your results suggest the interest rates are actually higher than the average I had been achieving previously. Might have to have a second look at Zopa as a viable investing option.
— “I’m not entirely sure it’s innovative – isn’t this exactly the same as the RateSetter provision fund?” —
I was actually about to say the same thing. Ratesetter has had this in place for ages. I think that Zopa felt it had to keep up with the competition.
I’m registered with Ratesetter, but almost as soon as I registered, the rates started to fall quite dramatically, so I haven’t used it yet.
You can find better rates with Pref shares, PIBS, some corp bonds etc but I have no idea how the risks compare.
I should keep a closer eye on Ratesetter. Not a bad diversifier for the cash element of your portfolio.
Steve
Tracker Rate is currently 5.6 % for me for 3 year loans, which seems pretty good until I look at my loan book. This shows that the rate on my 1000+ closed loans is 6.78 and it’s 6.72 on my even larger number of currently “on time” loans. Recent loans, however have been coming in at 5.5% for short term and about 6.4% for longer term. So the short term Safeguard rate seems competitive to me, given that my long term bad loan losses amount to .7%.
The best thing for me, however, was signing up for Founder Membership of Zopa, which allows me to lend without being charged any fees by Zopa.
Great write-up, it adds a lot of clarity to what I read earlier. Thanks!
I noticed SafeGuard lenders jump the queue for lending out, therefore as more lenders adopt SafeGuard, a similar number of non-SafeGuard lenders need to be squeezed out. For this reason if you are into Zopa I suspect you should opt into SafeGuard too.
However, I’m a net-withdrawer from Zopa at the moment, for two reasons.
– One is that compared to other investment options I would like a bit more return after tax & fees to compensate for the loss in flexibility (either that or I need to factor in the rapid return fees to the calculation). Comparisons with safe building society accounts are not comparing apples with apples.
– The second reason is I just got a new S&S ISA allowance to fill up. Each pound of tax free investment is a gift from the government that just keeps giving, year after year, for the rest of my life, and to max out the compounding magic & therefore tax benefits, the ISA needs to be filled each year before I invest elsewhere.
I suspect the new system may have to do with up and coming regulation for P2P. I’ve tried it out on a very small scale and, not surprisingly in view, the money was lent out at lower rates than my normal stuff.
After a small spate of defaults in early 2012, I’ve been pretty happy with my Zopa rates, apart from the gentle drift downwards, which seems inevitable to some extent. In my view, this attempt to de-risk and be more like Ratesetter isn’t what I want and just tends to homogenise the market.
Macroeconomically, what is going on at Funding Circle is more significant: FLS is depressing rates with no sign that more companies want to borrow and invest.
“I’ve been lending with Zopa for nearly a year now and not had a single defaulter”.
Well my default rate is triple my zopa fees. (Mostly from “B” grade people.)
I have stuff like below where some guy borrowed £15k (though only a tenner off me). The current status is:
“[29/04/2013] P2PS have ascertained the debtor lives in Australia”
Sigh.
One ‘flaw’ with Zopa is that borrowers can pay up early. This means that when global rates go down, so will new loans and old loans are more likely to be paid off. However, when rates go up you are stuck with loans taken out when they were cheap.
Similarly, I’m not sure how many people pay their loan off early, and if that counts towards their estimates of good loans. If all the best people pay off early, wont I end up with a portfolio stuffed full of defaulters?
>If all the best people pay off early, wont I end up with a portfolio stuffed full of defaulters?
@Greg, Only if you withdraw the cash. If you relend then, over time, your default rates should approach the mean.
One of the things I like about Zopa is that the cash just keeps coming in day after day. This can be really useful, since you can relend or cash out as you wish. It’s like having a high interest current account with a free overdraft facility.
@The Investor
> …… well exclude my own post from your “media” overview as I’ve said nothing about 8% etc…
Sorry i really suggest to put you in this bracket, far from it!
@Geo — No worries, thanks, I didn’t really take it that way. Just wanted to stress I *am not* suggesting 8% returns were on offer. 🙂
Hi I,
I’ve never tried p2p lending, purely because of the dodgyness of the whole business… It seems much more regulated and safer now. It might be worth checking out but not as a replacement for the trusts and funds I dabble with, but as a way of diversifying the portfolio….
Cheers
p2p lending still seems quite risky because there is always a chance of failing getting your returns. Plus even if the company will start chasing those who own you money, they usually don’t succeed.