Zopa Q&A: making bad debt history

Zopa answers our questions related to its new Safeguard feature, which wipes out bad debt and enables you to invest more quickly through an interest rate tracker.

For my recent article on Zopa's new Safeguard and tracker systems, I asked Zopa to answer a series of questions that clarify what's going on.

Q: Firstly, is this statement correct: the tracker rates will automatically split money between different grades of credit.?

A: “Yes. On Zopa you lend in small chunks to many borrowers with different credit ratings looking for different loans sizes and terms. It’s worth pointing out that all Zopa borrowers have a good credit rating.” 

Q: Can I assume that bad debt will now no longer be a tax issue? 

A: “Yes lending through the new Safeguard tool is beneficial to taxpayers.”

How your money will be lent

Q: Regarding money lent in the tracker, how do you decide how much money is lent as A, B, etc..?

A: “As a saver sets up their Safeguard lending offer, they can choose whether to lend up to three years (for a projected return of 4.6% ) or up to five years (with a projected return of 5.1%).”

Note that those projected returns aren't fixed in stone – they'll change depending on when you invest and interest rates at the time. 

“They can also view the individual tracker rates and the proportion of different loan sizes and credit grades we have lent to over the last few weeks, which create the projected returns. So Zopa doesn’t decide how much money is lent to each, it is based on the volumes of borrowers looking for loans on Zopa.” 

Q: Looking at the rate history page in my Zopa account, it looks like you can only lend new money now through the tracker system – the tracker isn't optional. Is that correct?

A: “Our 40,000 existing Zopa savers can choose to use Safeguard and/or the older lending functionality. New savers signing up see the Safeguard tool which provides easier, safer lending at great returns.”

That answer from Zopa shows that it actually thinks of the tracker as part of the Safeguard system, not a separate on.

Q: If so, what if lenders using Safeguard want to lend more to A* and less to B, for example? Is there no way to do this?

“The Safeguard was created to cover savers in the rare instance a borrower is unable to pay back. Because the saver doesn’t need to worry about borrowers not paying back, choosing between A* or B is no longer relevant. The important thing is to lend money quickly and earn the best available return, which the tracker rates enable.”

Q: Can you still set your own minimum interest rates at which money will get lent out at (whether you use the tracker or not)?

A: “The older style of lending offers continue to function as before.

“Savers are able to earn great returns through Zopa because it is popular with sensible, creditworthy borrowers looking for a cheaper and affordable loan. So, to lend money quickly and keep it earning interest, Zopa savers need to offer money to borrowers at rates that are competitive with those offered by banks and other lending companies.

“The rates available for different loan sizes, terms and credit ratings from banks and other lenders can change frequently. So we developed the tracker tool which delivers savers the best available return on lending by taking into account:

• The rates currently offered for different types of personal loans by UK banks, building societies and other lenders.

• Whether the amount of money being offered by all lenders through Zopa is enough to meet borrower demand.

• A minimum threshold set to deliver a projected return that is always at least 1% above the average of banks’ savings rates on easy access and fixed-term accounts.”

How the tracker works

Q: In the first few days of its operation, has the tracker dramatically increased the speed at which people lend compared to the previous automatic option? Or do you expect it to?

A: “Yes people are able to lend money much more quickly because the tracker helps them to lend efficiently at competitive rates.”

Q: How does Zopa track loan rates for less than prime borrowers (A and B instead of A*), since lenders only ever advertise their lowest, primest rate?

A: “Yes it is difficult to get data on loan rates from other lenders for customers who do not receive the representative APR from other borrowers. But our borrowers are smart people who shop around for the best rates. We can see by the uptake of loans by A and B customers whether our pricing remains competitive compared to other lenders.”

Q: Where exactly in between loan and savings rates does it track?

A: “The average of banks’ savings rates plus 1% is used as a minimum floor rather than a tracker. Today the projected return for up to three years is 4.6% and for up to five years it is 5.1%.”

Q: How do you decide the size of the impact that the money available to lend on Zopa will have on those rates?

A: “We have internal metrics monitoring required saver money to satisfy loan demand but we don’t release these externally. However if there were insufficient saver money then obviously rates would rise.” 

What Zopa didn't say is that if there is too much saver money then obviously rates will fall. What happens if it reaches the floor of 1% above the average savings rate and then even more savings pile in? This sort of problem – too much money chasing investments for lower returns despite the risks not shrinking – is a problem that investors in all types of investments (bonds, shares or whatever) have to face at different points.

The differences with RateSetter's provisional fund

Q: ?If I asked you to explain the single biggest difference between Safeguard and RateSetter's provisional fund, what would it be?

A: “The Zopa Safeguard, which covers your capital and interest if a borrower is unable to repay, was based on eight years of credit history lending over £300 million with a lower default rate than banks and other peer-to-peer lenders.

“On top of providing the Safeguard, Zopa continues to diversify your savings into £10 chunks as we believe diversification is a sensible and responsible approach to keeping savers’ money safe.

“But importantly the new Safeguard tool doesn’t just offer great returns and peace of mind, it’s also a really easy way to earn the best returns. Plus with Zopa you can see information on who your borrowers are and what they use their loan for. It’s more interesting.”

Q: Finally, RateSetter is claiming historical bad debt is 0.37%, but Zopa says its bad debt is the lowest. I'm sure it's a technical difference, but please could you explain this discrepancy?

A: “Our defaults are the lowest. Our default rate on all lending over our eight year history is 0.78%.

“The key with comparing default rates is that you have to measure them over the same period. Ratesetter has only issued loans for just over two years. Therefore most of their loans haven't run to the end of their course. Typically loans do not default in the first 12 months so until you have a large volume of loans that have run their course you don’t really know what your default will be.

“We have been going for eight years and have lent over £300 million so we have large amounts of historical data to measure. Our default rate on lending since November 2010 is 0.2%.”

Zopa was also lending at a time of greater economic crisis, when bad debts were higher, which would make its long-term bad debts seem worse than RateSetter's.

Compare the rates you can get as a lender with a peer-to-peer site at Lovemoney.

More on peer-to-peer lending:

Get zero bad debt on Zopa

Peer-to-peer investor returns fall to 5.1%

Peer-to-peer lending set to be regulated

Why I've started saving with RateSetter

What is peer-to-peer (P2P) lending?