Zopa

The Idea:
Set up the Bank of Dave (or Sue or Brian). Be a Zopa lender.

Zopa offers the chance to get a cut of the banks profits

As I have begun to build a small pool of holdings in cash, I need to begin looking at ways I can maximise my return on this. The first I have chosen to look at is Zopa. It is a ‘peer to peer’ lending site. This is essentially a way for people to lend and borrow money directly between one another, circumventing the need for banks and the associated expensive rates and charges, or lowly interest rates. In it’s most basic form a bank works in exactly the same way – it takes your money, if you’re lucky it pays you a percentage back in interest, then it uses your money to lend to those looking to borrow, charging them an interest rate much higher than they are paying to savers and keep the profit. When you think about it this way, it truly is an incredible concept that multiplies money indefinitely. Zopa takes the banks out of this equation and allows regular savers to get in on this money creating act. This allows both parties to win – savers get a bigger return on their money and borrowers get a cheaper interest – all because the banks aren’t making huge margins in the process. Don’t get me wrong, I’m not trying to bash banks – I think they provide an essential service in the economy and get a fairly bad rap, if you can use supply and demand to your advantage to generate money why wouldn’t you. By lending on a peer to peer site like Zopa I would be doing the exact same thing, just on a far smaller scale. There are a handful of other peer to peer sites, but Zopa is the longest running and, after reading around, in my opinion the best option but others can be worth a look. I have some experience of the site as I have lent a small amount out personally (not as part of this project) nearly a year ago – largely to test the water somewhat and see how viable an alternative it is to a traditional bank account. As such I can speak somewhat from experience with it.

Investment Required

There is a minimum investment of just £10 and no upper limit, so Zopa can be tailored to just about any level of investment.  There is no cost involved as the 1% annual fee will be covered by interest earned. It also takes virtually no time – once an account and a lending offer has been set up it manages itself, although the occasional check to ensure interest rates set are still competitive and all money has been lent out is advisable. It probably takes about half an hour to set up and then 5 minutes every month just to check it is still going smoothly. I currently have around £500 in cash holdings, so I am going to base my analysis upon the assumption of a £500 investment.

Capital: £500

Time(hrs): 0.5

Return On Investment

It isn’t quite as simple as a single interest rates due to the way Zopa works. It carries out checks on each borrower and rates them accordingly. Each borrower is then assigned to a market ranging from A*-B according to these ratings. The A* market is seen to be the safest and as such the lowest return whilst B is perceived to be the riskiest and so offers the highest return. Lenders can choose which market/s they wish to lend in and set the interest rate at which they are willing to lend in each (clearly this has to be competitive to the market forces otherwise it will never be lent out). Each of these markets is also split int longer (4-5 years) and shorter (1-3 years). There is an option to withdraw money before full repayment, incurring a 1% penalty. Importantly, there is the option to set all earnings to be re-invested and automatically lent out, taking advantage of the principle of compound interest. To summarise all this, Zopa boasts an interest rate after all charges and average annualised defaults over the past six months of 5.1%. It is worth noting it will take some time for money to be matched to a borrower, and thus there will be a period of not making any interest – probably around 4 weeks for the full £500 to be lent out.

Projected ROI:  5.1%

ROI inc. labour:  4.5% (based upon minimum wage of £6.19/hour)

Expected Return: £25.50

Having held a very similar amount in personal funds on Zopa for about 10 months now, I can vouch that these statistics are pretty accurate.

The latest interest rates offered by Zopa (correct at 20/04/2013)

The latest interest rates currently offered in each Zopa market (correct at 20/04/2013)

Skills/Resources Required

This doesn’t take any specialist knowledge or skills. It is pretty easily done and all explained simply on the Zopa website. All it really needs is some capital – although starting at £10 this shouldn’t be too hard.

Risk
Zopa Lending amounts by quarter

Zopa has seen a steady growth in lending since its launch in 2005

There is clearly some risk that borrowers will default. Zopa undertakes stringent credit checks on each borrower to minimise this risk (it reports that it rejects around 75% of borrower applications). Another measure is to diversify the lending portfolio – and therefore in theory the risk – by limiting how much money one individual borrower can borrow from one lender. For example, the standard amount is set to £10, so if I was to lend £500, this would be lent to 50 different people in portions of £10 each. So a borrower will actually be lending from hundreds of different lenders. This is far less complicated than it might sound and the theory is that if one borrower defaults it will have a relatively small impact rather than wiping out a whole investment. It should be noted that Zopa has no FSCS or government protection, so if something was to go drastically wrong it could be bad news. However, there are a myriad of measures in place to ensure this never happens, as pointed out here.

Scalability

The amount lent can easily be scaled up as time goes on simply by adding funds to the existing offer. Nothing else needs to be adjusted and Zopa will take care of matching it all off. In this sense it is very easy to increase the scale. However, the return on any investment will always be capped at the current interest rates and there is nothing that can be done to increase that.

Viability

I do like the idea of Zopa, and it certainly offers a higher rate of return with more flexibility than any bank account currently available. I also like the thought of earning almost the entirety (less the 1% Zopa fee) of the profit my money generates in the lending market rather than someone else profiting from my savings. However, I feel that for my needs it may just be too slow to yield a return, especially by the time the money has been matched to borrowers. I feel there will be better opportunities to invest in with higher returns – whilst they may carry more risk I need to be slightly more adventurous in my investing strategy if I am going to achieve my goal. As such I am going to pass on Zopa and look for other opportunities to invest my money in. I would point out here though, whilst I have been looking at Zopa in terms of lending here, it will be worth bearing in mind in the future as a viable way of raising capital if the need arises.

The Verdict

Non-starter

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Comments

  1. brian says:

    One aspect to consider is that zopa returns are not tax free. An ISA may be a better deal.

    • Yes that can be the case. It all depends on the rates of interest and tax bracket you are in. In the current climate a standard rate taxpayer would still most likely do better through Zopa, whereas for a higher rate taxpayer it would work out roughly the same. That’s based on a Cash ISA, with stocks and shares it’s difficult to say.

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