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Good and Bad News for Zopa Lenders

By Matthew Howard on 7th January, 2015 | Read more by this author

Zopa, the oldest peer-to-peer lending company in the world, has increased its interest rates to 5.1% and 4%, but, at the same time, it has removed its rate promise.

Zopa's rate promise has been assuring lenders for over a year now that they will get a specified minimum interest rate.

That's even if the loans their money is allocated to average a lower rate. With Zopa, you do not choose your borrowers, but your money is automatically diversified across many different borrowers, mostly low-risk, “responsible” borrowers.

Zopa rate promise now an estimates

With Zopa dropping its rate promise, it has returned to its old system. This means the rates quoted are estimates. This differs from nearest competitor RateSetter, which pays you the quoted rate.

On the Zopa website, Mat Gazeley wrote: “It is important to remember that lending through Zopa provides lenders with a basket of many micro loans, meaning some loans may be lower or higher than the rate advertised.”

Improvements to an old system

Zopa has previously using estimated rates, before it introduced the rate promise. At the time, it received some criticism from some lenders who received less than projected.

However, Mat said: “We are now confident that we can deliver you an average return that the rate of the market you decide to lend in.”

This is made possible as Zopa starts lending to borrowers at a higher interest rate, on average. Mat wrote: “We have a different mix of loan yields being written…There are still some loans processing from the old mix, and in the next few days you may see some loans at less than the advertised rates, but these will increase as the new mix comes through.”

The hidden message there is that perhaps you should lend again on Zopa a few days from now, when the new batch of loans comes in.

“Our data science team are closely monitoring loans being matched in order to deliver the rates advertised. Over the course of this month we expect to meet the headline rates for lenders. Actions are being taken to deliver the expected returns for lenders.”

If you're lending just small amounts through Zopa, and not re-lending, it makes it harder for Zopa to balance your interest rate correctly. Potentially, you're at a higher risk of earning less than estimated.

Higher rates, higher risk?

A more efficient system like this enables Zopa to increase average interest rates. Indeed, it already has done just slightly. Higher rates could also indicate that Zopa is loosening its criteria when selecting borrowers just a little bit. But this is far from certain. And none of Zopa's 50,000 lenders have lost money since it created a bad-debt provision fund to pay for lenders ‘(relatively few) bad debts. It has a 4thWay® Risk Rating of just 12 out of 50. This makes it one of the lowest risk options with, in 4thWay's opinion, a low chance of losing money when lending for several years.

If you want even higher rates, you can already choose to increase the risk – and potential reward – for yourself. Your online account has a checkbox that allows Zopa to lend your money to higher-risk borrowers.

In addition

Zopa has stepped it up a notch: for the first time it received more than 1,000 loan requests in a day. Plus, over £2 million has been lent through the website, two days in a row, according to 4thWay® data. Anecdotal evidence is that lending money swiftly has been very easy; a relief for Zopa lenders after the difficult December period where borrowers have been typically slow.

The 4thWay® Risk Ratings were devised by experienced investors and a debt specialist from one of the major accountancy firms. The score is calculated using objective criteria that can be measured and improved over time, although no risk-scoring system is perfect. Read more about the 4thWay® Risk Ratings.

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