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10 Years of Zopa: 10 Times More Interest Than Losses
Zopa, the oldest P2P lending company in the world – the one that started it all, right here in the UK – turned 10 today.
Let's look into how well it has contained losses, even during the worst recession for nearly a century, and how well it has rewarded lenders compared to savings accounts.
I'll start by looking at losses before looking at the rewards, since controlling the risks is the most important aspect:
No losses since Zopa's provision fund started
Zopa started its own bad-debt provision fund in early 2013. In the two years since then, no lender has suffered a loss after tax.
Very few losses pre-provision fund launch
This astounding record is due to a combination of tight borrower selection and allowing lenders to easily spread their risks across lots of loans.
However, a small number of people will have lost money after taxes before Zopa introduced its bad-debt provision fund.
This is because of a bizarre anomaly in the way P2P lending companies are taxed, combined with higher bad debts during the 2008-2010 financial crisis.
If you make a loss, you can't currently offset that against the interest you've earned for income tax purposes.
Let's say you earn 6% interest before bad debts but you have a bad year of losses (e.g. 2009 or 2010) and so you earn 2% after bad debts. You'll still have to pay tax on 6%. So a basic rate taxpayer would effectively earn just 0.8% and higher-rate taxpayers would make a small loss.
Bad-debt provision funds help you dodge this problem, because the losses are paid for from a separate pot. In other words, you get to keep the full 6% and you suffer no losses anyway.
Only in the extreme event that the whole fund is depleted will you have to take on any additional losses – and accompanying tax disadvantages – for yourself.
P2P Pensions, as well as the soon arriving P2P ISAs, will also help you dodge this problem. I hope new, more sensible tax rules around losses will also come soon!
No losses over the long term
By my own rough estimates, I think it unlikely that any lender, including higher-rate payers, will have lost money in Zopa when lending and re-lending consistently over the 10 years.
Even if they lent during the crisis years and not at all in the bad-debt provision fund years, just about everyone with such a strategy would have made money if they kept it up for just five years, although the unluckiest might have been in a fairly close fight to get an overall return that beat rising prices.
Comfortably beating savings accounts and rising prices
Over the past 10 years, even higher- and additional-rate taxpayers could have expected to get returns far in excess of inflation and considerably in excess of savings accounts rates.
If you shopped around for a cash ISA (that's a savings account that is tax-free) very diligently, sometimes as often as every six months, you could have turned £3,000 into £4,300 over the ten years after tax.* If you didn't shop around very often, you would likely have got far, far less.
Zopa returns have averaged 5.6% over ten years, which boosts your returns to £5,200 after bad debts and fees. That's nearly £1,000 more and it's 70% more interest than in the best cash ISAs.
After taxes, a small number of unlucky people could have done worse than average and might even have lost to cash ISAs, but, with a historical annual bad-debt rate of just 0.58% and a bad-debt rate of just 0.25% since 2010, that has become even less likely at Zopa due to the tax advantages of its provision fund.
10 years of extraordinary resilience
Considering this takes in a period of time where we have had the worst recession since the 1930s, Zopa has shown how fantastically resilient it can be for lenders.
Lenders have collectively made £46 million in interest, which outweighs bad debt losses by something in the region of ten to one.
Zopa was tested hard just a few short years after it started and yet it took the battering extremely well. As Zopa pointed out to me today, it's the only P2P lending company to have been through a “cycle” involving a recession. And it was quite a recession!
All this explains Zopa‘s current very low calculated 4thWay® Risk Rating of 12, which puts it just four risk points above a savings account. The highest score is currently 50, although 4thWay® hasn't got around to calculating the risk rating for the most risky P2P lending opportunities yet, which will likely be tens of points higher.
Zopa expects to mark its 10-year anniversary with a bang in summer by passing the £1 billion loan mark. 58,000 individuals have lent to 107, 000 individual borrowers.
Read more on taxes and tax-free lending:
Sources: 4thWay® data research, Zopa, This is Money, The Telegraph, MoneySavingExpert, Market Oracle, The Guardian.
4thWay® Risk Ratings: no risk-rating system is ever perfect and they cannot consider all factors and future events. Read more about the 4thWay® Risk Ratings.
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