In the past year, Zopa, one of the largest UK peer-to-peer lending platforms changed their product structure to provide retail investors with a quick access and higher yield account. We, at Orca Money, have conducted analysis on the Zopa loan book to demonstrate the level of risk investors might expect when investing in these products. Currently, as an investor, you can choose from three investing options on the Zopa platform: Zopa Access (3.5%); Zopa Classic (4.3%); and Zopa Plus (6.7%). The differences in these products largely relate to the Safeguard (provision) fund cover and early access features.
The risk categories of the underlying loans within the Zopa Access and Zopa Classic are the same, A-C, while Zopa Plus also contains slightly riskier D and E category loans. With higher risk loans bundled into Zopa Plus, the Safeguard fund will not cover investor losses when investing in this product
To access your money early a 1% fee is applicable when investing in Zopa Classic and Zopa Plus, while the Zopa Access product has no associated early access fees.
Can I access my money without paying a 1% fee when investing in the Zopa Classic or Zopa Plus product?
In short, yes, you can access your money without paying a 1% fee however it will take time to receive your original capital and corresponding interest. As a lender you are investing your money into the lifetime of a loan with borrowers paying back these loans on a monthly basis. When starting to invest across the Zopa platform your funds are set to automatically re-lend as you receive your monthly payments. If you want to access your money you could choose not to re-lend your monthly payments and let your loans run their course. With loan terms up to 60 months on Zopa it may take up to 60 months to receive all your capital and interest back, if you choose not to re-lend.
The headline, advertised interest figures assume that you re-lend your money, so if you were to turn this setting off your actual interest rate would reduce. Depending on the length of the remaining loans it may be better to take the 1% hit and invest the funds elsewhere.
The estimated return and actual return as reported by Zopa and shown in the chart below demonstrates the accuracy of Zopa’s forecasts.
As the estimated and actual returns have converged in the past 3 years, indicating that Zopa has gotten very good at forecasting investor’ returns. As Zopa accumulate more data and employ a larger team of data scientists they are better able to predict the performance of their returns.
Amount Lent — Liquidity
The amount a platform lends is important for two principal reasons:
- Credit Modelling: The more a platform lends the more data it has to build its credit processes. Effectively, the more experience a platform has at lending the better it gets at evaluating credit risk.
- Early Access: To access your money early a new lender/investor must be available on the platform to fulfil your borrower commitment. The more the platform lends, the greater the probability of new lenders.
Cumulatively, Zopa has lent £1.6bn, growing year-on-year since being founded in 2005. In the past three years we have seen significant capital on the Zopa platform form institutional investors, predominately through an investment trust called P2P Global Investments.
The pie chart below shows that Zopa borrowers are generally spread throughout the UK. This spread is good for lenders as it reduces the economic exposure to a particular geographical area.
Default Rates- Performance
In general, Zopa’s default rate appears to decline after a significant spike during the 2008 financial crisis. The reduction in default rate, however, should be read with caution as there are significant numbers of loans which commenced in 2013–2016 still in circulation which could still default. Loans later in their life could also be more likely to default.
Security -Diversification
The level of diversification Zopa offers is the principal protection offered to investors. The Zopa platform splits your money into £10 chucks which are lent to borrowers. If you lend £1000, your exposure to one loan is 1% and if you lend £10,000, your exposure is 0.1%.
The lower your exposure to one loan the more diversified you are and the lower the risk.
Safeguard Fund
If a borrower misses a payment for four consecutive months, the loan is considered defaulted. If you invest in the Classic or Access product this loss should be covered by the Zopa Safeguard (provision) fund. The ability for the Safeguard fund to pay out is affected by the amount of money in the fund relative to the level of bad debt.
The chart above demonstrates that the provision fund will cover any losses up to 3.75% of the outstanding loan book. After 3.75%, your interest will be affected and if the default rate rises above 8.49% your original investment will be impacted.
In 2008, the year of the financial crash, Zopa’s default rate equaled 5.33%. If a crisis of this scale occurred again the safeguard fund would be depleted and investors’ interest would be reduced to 3.33%. In this scenario, Zopa investors would still earn a return of £33 from a £1000 investment, which is a pretty reasonable result considering the FTSE 100 (index) fell 31% under the same conditions.
Zopa Borrowers
Zopa’s borrowers are typically individuals wishing to borrow money to consolidate debt, purchase a car, fund a wedding or pay for home renovations. Only individuals who meet the following criteria can borrow from the Zopa platform:
- Identity confirmation
- Be at least 20 years old
- Have credit history that can be evaluated
- A good track record of repaying debt
- Be a current UK resident
- Have 3 years of address history in the UK
- Have an income of at least £12,000 per year
- (this could be a salary or pension)
- Be able to afford the loan
A major benefit for borrowing through Zopa is that there are no penalties for paying loans off early. This is very common on the Zopa platform with 64% of all completed loans being paid off early. If a loan is paid off early, this does not affect you as a lender as your funds will simply be allocated to another borrower.
The minimum, maximum and average loan size for the past 4 years is displayed in the table below.
Borrowers are required to pay their interest rate to lenders as well as a fee to Zopa and an additional fee to contribute to the Safeguard fund. The weighted average borrower rate can be seen in the chart below.
The weighted average borrower rate rises in 2007/2008, potentially in line with an increase in risk during the Crisis, before dropping to a low in 2013/ 2014, when a low in investor return of 4.5% was also experienced. The borrower rate has been increasing over the past three years with the introduction of institutional capital and the more risky E-F grade loans. With the introduction of the Zopa Plus product these higher risk, higher reward loans are now being offered to retail investors.
Borrowers typically lend for 3 or 5 years but can borrow over a 1, 2, or 4 year period as well. The number of loans in each loan period category can be seen below:
Conclusion
The availability of Zopa’s loan book has enabled us at Orca Money to run detailed analysis to better understand Zopa’s offering. The level of transparency far exceeds what you could expect in other retail investment products and we wish to present this type of analysis to help investors make decisions. We’re very keen to receive feedback from Retail Investors, Financial Advisors and Asset Managers on the P2P market and the type of analysis that may be useful.
