Zopa - 1 Month Update

I wrote a while ago about “Zopa - Experimental Investment” and my initial experience and plans to use the service, so just under a month later here is my update of how things are going!

As mentioned in my previous post, my aim was to set an extremely competitive rate of interest in the hope of attracting borrowers as quickly as possible. On the whole this strategy worked, with almost the entire sum being “processed’ within the first week. However one thing to note is that just because a loan is being processed it doesn’t mean you are guaranteed that that money will be lent.

All of the money I put into Zopa has now been lent to borrowers and in my opinion that is extremely efficient. 60% of my money went to A* rated borrowers with the remaining 40% going to A rated borrowers. Looking at the information on demand, these two categories are by far the highest so it makes sense to include these in your offers.

Below is a breakdown of my current loan book with the borrowers blurred out for privacy reasons:

One thing I was pleasantly surprised to find was that magically, 4p appeared in my account. It turns our Zopa will pay you interest on money sitting in the holding account waiting to be distributed which I didn’t expect! It isn’t a high rate of interest but some is better than none.

Bank or Betting Shop

I think it is a fitting reflection of the current economic climate that in the ‘banking sector’ of Coventry, one building society has shut up shop and the premises has promptly been taken over by a bookmakers.

We are undoubtedly entering a prolonged period of economic uncertainty where banks who once reaped huge rewards from high risk investments are now buckling under huge losses as a result of the slowdown. Furthermore, the public has lost confidence in the industry due to the collapse of something we all assumed was solid as a rock.

Understandably people are less willing to take risk, are reigning in spending in preparation for a difficult economic period and are far more cautious when they do invest. Ironically, it is exactly this pattern which will prolong this period of economic depression.

If spending increased to the rate it was 12 - 24 months ago, the economy would start to become more buoyant. Liquidity for companies would improve and the number of jobs would rise due to demand for commodities.

Interestingly, people also seem to be abandoning ship in relation to share investments. People tend to buy shares when there is confidence in a market i.e. when they are on their way up or at a high, and sell when confidence is reducing and therefore when prices are falling or at a low. This is obviously contrary to common sense which would really tell you to buy low, sell high. Fortunately for us, shares are low at the moment. Maybe not as low as they will be, however the number of shares you can get for your initial investment is probably around the highest we are likely to see in our lifetime.

Even in the market continues to fall, it will certainly grow in the future and greater rewards and lower risk are found in longer term investments.

Zopa - Experimental Investment

Zopa is a social lending platform enabling people to lend and borrow from each other. Some people would say this sounds a bit risky, however Zopa credit checks applicants using the same methods banks use and looking at their statistics, they have a very low rate of bad debt (0.16%).

Zopa members also have the opportunity to define how risky or how safe they want their loans to be by selecting the length (36 or 60 months) and the percentage interest rate.

Setting a higher rate will yield higher returns but is less likely to be accepted by borrowers. Moreover, the higher the interest rate the higher the risk the debt will become bad.

Lenders can also select a risk level ranging from A* which is extremely good, to Young which has the highest risk. As the risk increases so does the reward however as you are generally able to gain a higher rate of interest.

Initially I am only investing £100 over a period of 36 months making the funds available in maximum chunks of £10 to A*, A and B credit categories. I chose particularly competitive rates of interest in the aim to secure borrowers as quickly as possible.

Above is an overview of my current position, and by offering competitive rates 80% of the funds are in the process of being lent.

One of the things I find particularly interesting about this process is that as borrowers repay debt on a monthly basis the funds are credited to your account and you can automatically reinvest this capital, further increasing the potential for interest.

Check back in a month for my first update of how its going.