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Zopa’s Incredible Results In 2015
Bad debts on the 23,000 loans issued by Zopa in 2015 so far are virtually zero, despite more riskier borrowers.
In my article Zopa Risks & Lending Speed Rise, Rates Stable, I reported that Zopa is accepting more loan applications than it used to, so that it can offer enough loans to a growing number of lenders.
It is also accepting a mix of borrowers in 2015 that includes more who are a bit further up the risk scale. By doing so, it can charge the borrowers more interest on average, and therefore fight a fall in interest rates earned by lenders like you and me.
Early results look fantastic
Despite those two changes, Zopa's bad debts for loans issued in 2015 are, so far, just 0.000279%. That's just five loans with a total of less than £50,000 outstanding that have gone bad out of over £171 million in loans this year.
Naturally, more will go bad as the months go by, but it is a fantastically reassuring start.
77 loans issued in 2015 are currently late, with most of those having made few or no repayments at all. But that is a small fraction of the 23,000 loans that Zopa has matched this year so far.
The average borrower interest rate on the loans that are either late or have gone bad is 12.9%. The average interest rate for loans that are running smoothly or have already been repaid is 7.9% – five percentage points lower. This huge difference is a good indication that Zopa – unsurprisingly – is very good at pricing risk.
In addition, Zopa pays more money into Safeguard, its bad-debt provision fund, the more risky each borrower is.
Bad-debt history and forecasts
Probably one of the reasons Zopa has stuck to personal loans only is because it understands these borrowers so well, and learns more from them every month. This seems clear from its higher acceptance rates but doggedly low bad debts.
Zopa has an average annual bad-debt rate of just 0.6% since 2005, even though it is the only P2P lending website to have been around through the severe financial crisis of 2008-10. Since 2010 it has a bad-debt rate of 0.48% per year, which is very low indeed.
These bad debts have been easily covered by Zopa's bad-debt provision fund, since it was introduced.
Zopa is accounting for total bad debts on loans issued in 2015 to reach 3.2% – that's over the life of the loans, not the annual rate. This is its highest forecast in seven years.
It is no wonder that, due to its great reputation, lenders have piled in and pushed interest rates down. However, my own view is that Zopa‘s* projected lender interest rates of 3.8% over three years and 5% over five years are still easily high enough for the risks involved, even if another major financial crisis were to occur.
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