Zopa - Default loans
Discussion
Countdown said:
I caught it this morning. The bits I picked up were
"They use the same credit scoring system as the banks. They offer lower lending rates than the banks. They've been going since 2005 so if there were any flaws in their business models they would have been identified by now."
I would still be interested in finding out why P2P borrowers are supposedly a higher risk than those that use mainstream banks.
Ok. You need to look at their loan book structure to see the issue in waiting. "They use the same credit scoring system as the banks. They offer lower lending rates than the banks. They've been going since 2005 so if there were any flaws in their business models they would have been identified by now."
I would still be interested in finding out why P2P borrowers are supposedly a higher risk than those that use mainstream banks.
If they are paying out 4% then this means that their best lend must be at what 6%+?
So their most prime borrower is at best a client who is high enough risk to have to lend at 6%. Unlike a conventional lender they have absolutely no prime borrowers to form any kind of cushion to their book. So their entire book of loans is comprised of higher risk consumers with no prime lending to give it any foundations. What that means is that an increase in the market default rate will have a huge impact on a P2P book of loans in contrast to a banks.
So you can see that 'using the same credit scoring system as the banks' is just more of the marketing guff. It's a phrase designed to make thebconsumer instantly think it must all therefore be as safe as a bank. But just from the simple realisation above you can see that it isn't.
And then there is the pricing of their loans. Why are they undercutting the banks? If they are paying as much as 4% away to borrow capital from the market how are they then able to under cut lenders who are borrowing at 0.5% when lending out? Who is pricing their risk incorrectly? Why does a P2P lender need to undercut the banks? And of course, if they are undercutting the market then that means they are building a risk book at the wrong price. Like Northern Rock et al. It's amazing how in less than 10 years the retail market has completely forgotten the risks of a lender mis pricing their loans to build market share.
And finally, what size is the P2P industry's collective bail out fund compared to the size of the loan book or what size is their balance sheet compared to their loan book.
So what you have with P2P is an under priced loan book comprised solely of higher risk debt. All held by firms which have tiny balance sheets and no ability to compensate for an uplift in the market default rate and here's the kicker: The Government even refuses to underwrite the lenders. That alone should open peoples' eyes. The Government who prides itself on offering 100% security to small lenders will not extend this cover to P2P. Is it because they don't like the colour scheme of the websites or because when they look at how the lending facilities are structured they have no interest in underwriting the risk and also want to send a clear message to consumers that there is no safety net because this product is not just less safe but hugely so.
Oh, and the final clue? Why are rates to lenders falling? What's changed in the loan market? Have loan rates fallen or is the industry trying to undo an issue with their loan books?
The key thing here is that people need to stop comparing lending money to a company they have no control over and no security with to placing their money in a bank account. They are two manifestly different products where the high risk borrower is using marketing and cheap spiel to try and get punters to think they are the same as the safer product.
One is saving money the other is speculative punting with a grotesquely skewed risk/reward.
DonkeyApple said:
One is saving money the other is speculative punting with a grotesquely skewed risk/reward.
I enjoy reading your authoritative contributions, DA.
This is predominately a car enthusiasts forum, so the OP might allow us a brief aside from P to P.
I see on your Profile page that you are a Range Rover and TVR enthusiast.
There is a link there with Aston Martin, because some present owners also have a Range Rover, and many have previously had TVRs.
Have you ever considered, or looked into history / world of Aston Martin ?
We are much lower profile than the Italian marques, and our joke is we are always faster than a Porsche, because an AM is always quickly let out from side turnings.
Edited by Jon39 on Tuesday 17th October 09:49
Jon39 said:
I enjoy reading your authoritative contributions, DA.
This is predominately a car enthusiasts forum, so the OP might allow us a brief aside from P to P.
I see on your Profile page that you are a Range Rover and TVR enthusiast.
There is a link there with Aston Martin, because some present owners also have a Range Rover, and many have previously had TVRs.
Have you ever considered, or looked into history / world of Aston Martin ?
We are much lower profile than the Italian marques, and our joke is we are always faster than a Porsche, because an AM is always quickly let out from side turnings.
Edited by Jon39 on Tuesday 17th October 09:49
The Rapide is the AM I keep looking at. There is a very common link between Tivs and Range Rovers. As a two car set they work perfectly and cover pretty much all requirements. And there does seem to be a similar link between past Tiv ownership and current AM ownership on PH. I often take the Micky out of such owners that when I reach their grand old age then I will almost certainly follow them.
Long answer is that back when I owned the Griff I also bought an XKR but I found that they were too similar and that I simply don't drive enough in order to justify two cars that do very similar things.
If I bought a Rapide then I know I would use the Typhon even less. Especially as the wife would always opt for that car over the Typhon when we go out as a family. So in reality it would mean selling the Typhon which I'm not ready to do yet.
Current return rates are 2.7% for A-C borrowers and 3.7% for A-E borrowers.
Most of my loads are between 2% and 10%, most fall between 5-6% A-B ratings customers.
Remember that banks headline rate of interest for loans only have to account for a certain percentage of customers for it to be a valid rate. My Credit rating was 999 but when i applied for a car loan the quote still came back 2% more than the headline rate.
Most of my loads are between 2% and 10%, most fall between 5-6% A-B ratings customers.
Remember that banks headline rate of interest for loans only have to account for a certain percentage of customers for it to be a valid rate. My Credit rating was 999 but when i applied for a car loan the quote still came back 2% more than the headline rate.
DonkeyApple said:
Ok. You need to look at their loan book structure to see the issue in waiting.
If they are paying out 4% then this means that their best lend must be at what 6%+?
So their most prime borrower is at best a client who is high enough risk to have to lend at 6%. Unlike a conventional lender they have absolutely no prime borrowers to form any kind of cushion to their book. So their entire book of loans is comprised of higher risk consumers with no prime lending to give it any foundations. What that means is that an increase in the market default rate will have a huge impact on a P2P book of loans in contrast to a banks.
Ok. I’m not sure that borrowing at 6% automatically makes somebody subprime. The best unsecured rates from mainstream lenders seem to vary from 3% up to 7% (i.e. the more you borrow the cheaper it becomes). I’ve seen headline rates from Zopa offering 2.8% which is cheaper than the mainstream banks. However, from what I can see, the main benefit of Ratesetter for borrowers is the short term flexibility. Banks want to lend for a minimum of 12 months (AFAICS). Ratesetter allows people to borrow from month to month and it may well be that that is more suitable for some people. Also lots of people have balances on their credit cards. If you’re one of those surely it makes sense to borrow at 6% rather than 19.9%?If they are paying out 4% then this means that their best lend must be at what 6%+?
So their most prime borrower is at best a client who is high enough risk to have to lend at 6%. Unlike a conventional lender they have absolutely no prime borrowers to form any kind of cushion to their book. So their entire book of loans is comprised of higher risk consumers with no prime lending to give it any foundations. What that means is that an increase in the market default rate will have a huge impact on a P2P book of loans in contrast to a banks.
You mention “higher risk”. Most of the P2P have been operating for 12 years plus, and were around pre-2008. If they were mispricing loans you would think that it would have bit them on the bum by now and yet it doesn’t seem to have done.
https://www.moneysavingexpert.com/loans/cheap-pers...
DonkeyApple said:
So you can see that 'using the same credit scoring system as the banks' is just more of the marketing guff. It's a phrase designed to make the consumer instantly think it must all therefore be as safe as a bank. But just from the simple realisation above you can see that it isn't.
I’m not sure everybody who lends through P2P assumes that it’s as safe as banks. It’s patently clear that you have no protection and that, if it goes belly-up, you have little or no recourse. That’s certainly made clear on the RS website.DonkeyApple said:
And then there is the pricing of their loans. Why are they undercutting the banks? If they are paying as much as 4% away to borrow capital from the market how are they then able to under cut lenders who are borrowing at 0.5% when lending out?
Different business model? Lower costs or fixed overheads? Wanting to increase market share? Isn’t that a little like asking how Uber are able to undercut black cabs or how Dixy’s Fried Chicken are able to undercut Pizza Hut?DonkeyApple said:
Who is pricing their risk incorrectly? Why does a P2P lender need to undercut the banks? And of course, if they are undercutting the market then that means they are building a risk book at the wrong price. Like Northern Rock et al. It's amazing how in less than 10 years the retail market has completely forgotten the risks of a lender mis pricing their loans to build market share.
I stand to be corrected but were Northern Rock’s problems due, at least in part, to the way they were financing their lending? Basically the money markets dried up and they weren’t able to borrow to cover their lending? I appreciate that they may not have been able to borrow because lenders weren't happy with the quality of their mortgage book. However Ratesetter's model seems different - they're not using short term borrowing to fund long term lending. If I lend to somebody for 1 month they have to repay within 1 month. If I lend to somebody over 5 years I can't expect repayment after 1 month unless somebody else steps in to my place. As such I cant see why RS would run out of money in the same way as NR.DonkeyApple said:
And finally, what size is the P2P industry's collective bail out fund compared to the size of the loan book or what size is their balance sheet compared to their loan book.
So what you have with P2P is an under priced loan book comprised solely of higher risk debt. All held by firms which have tiny balance sheets and no ability to compensate for an uplift in the market default rate and here's the kicker: The Government even refuses to underwrite the lenders. That alone should open peoples' eyes. The Government who prides itself on offering 100% security to small lenders will not extend this cover to P2P. Is it because they don't like the colour scheme of the websites or because when they look at how the lending facilities are structured they have no interest in underwriting the risk and also want to send a clear message to consumers that there is no safety net because this product is not just less safe but hugely so.
There are lots of other lending that is not protected. Bonds being a prime example, especially retail/mini-bonds. And why WOULD the Govt offer protection for the P2P market? Why put the taxpayer on the hook for a product that people use through personal choice?So what you have with P2P is an under priced loan book comprised solely of higher risk debt. All held by firms which have tiny balance sheets and no ability to compensate for an uplift in the market default rate and here's the kicker: The Government even refuses to underwrite the lenders. That alone should open peoples' eyes. The Government who prides itself on offering 100% security to small lenders will not extend this cover to P2P. Is it because they don't like the colour scheme of the websites or because when they look at how the lending facilities are structured they have no interest in underwriting the risk and also want to send a clear message to consumers that there is no safety net because this product is not just less safe but hugely so.
Banks have a completely different role in society insofar as 99% of people need banks on a day to day basis. We don’t have any other option but to have all our money going through them and therefore we want/need them to be strictly governed. Nobody NEEDS to use P2P. I would be genuinely stunned if people expected P2P to offer the same level of security that banks do.
As I said earlier I doubt if most P2P lenders think that Zopa et al are as safe as banks. If they ARE under that misguided belief then more fool them.
DonkeyApple said:
Oh, and the final clue? Why are rates to lenders falling? What's changed in the loan market? Have loan rates fallen or is the industry trying to undo an issue with their loan books?
Not sure about Zopa but Ratesetter rates are rising. They’ve gone from 2.9% to 4% over the last 12 months.DonkeyApple said:
The key thing here is that people need to stop comparing lending money to a company they have no control over and no security with to placing their money in a bank account. They are two manifestly different products where the high risk borrower is using marketing and cheap spiel to try and get punters to think they are the same as the safer product.
One is saving money the other is speculative punting with a grotesquely skewed risk/reward.
Speaking personally I have never seen P2P as comparable to banks. I have always seen them as higher risk. They are currently offering a slightly higher yield than FTSE100 stocks with the advantage of being more liquid (quick access, no transaction costs, no limits to deposits or withdrawals). FWIW I bought a shedload of Carillion shares a few months ago which are 80% down. That’s the way the cookie crumbles. Ratesetter also offers risk, more than putting the money in the bank, but they also offer more of a reward. As long as depositors are aware of that I don’t see a problem with it.One is saving money the other is speculative punting with a grotesquely skewed risk/reward.
Countdown said:
They are currently offering a slightly higher yield than FTSE100 stocks with the advantage of being more liquid (quick access, no transaction costs, no limits to deposits or withdrawals).
This isn't true. FTSE stocks are liquid with immediate access to funds - P2P loans are definitely not! You need to find a lender to buy your position from you which doesn't always happen immediately, plus if any loans are overdue you can't sell them. Also my share portfolio returns about 4% and has risen 5% this year...I've mentioned before but I had a decent chunk in ratesetter, zopa and funding circle (and also wisealpha but they were OK) and lost money on zopa and FC and had problems accessing cash at all of them. I am suitably terrified of them now and wouldn't dream of having money in them.
Edited by Badda on Wednesday 18th October 15:17
Badda said:
This isn't true. FTSE stocks are liquid with immediate access to funds - P2P loans are definitely not! You need to find a lender to buy your position from you which doesn't always happen immediately, plus if any loans are overdue you can't sell them. Also my share portfolio returns about 4% and has risen 5% this year...
There are dealing costs associated with selling stocks and shares, and past performance is no guarantee of future returns. My Ratesetter loans are invested on a rolling monthly basis so, at worst, I will have all the funds back within 1 month. In practice they will be returned in equal instalments over the month.Badda said:
I've mentioned before but I had a decent chunk in ratesetter, zopa and funding circle (and also wisealpha but they were OK) and lost money on all of them and had problems accessing cash at all of them. I am suitably terrified of them now and wouldn't dream of having money in them.
As far as I'm aware all bad debts in Ratesetter have been covered by the Provisions Fund so I'm not sure how you managed to lose money with them.When I looked at zopa for a loan (to me) it all looked Rosey and great assuring marketing for any investors. When I applied they asked for bank statements. At that point I declined to do any business with them and went to Sainsburys bank. Maybe they have a default issues if they are asking borrowers for such information?
I said on the phone you can see my credit file so why need sensitive account information'? That wasn't answered satisfactory.
I said on the phone you can see my credit file so why need sensitive account information'? That wasn't answered satisfactory.
Countdown said:
Badda said:
This isn't true. FTSE stocks are liquid with immediate access to funds - P2P loans are definitely not! You need to find a lender to buy your position from you which doesn't always happen immediately, plus if any loans are overdue you can't sell them. Also my share portfolio returns about 4% and has risen 5% this year...
There are dealing costs associated with selling stocks and shares, and past performance is no guarantee of future returns. My Ratesetter loans are invested on a rolling monthly basis so, at worst, I will have all the funds back within 1 month. In practice they will be returned in equal instalments over the month.Badda said:
I've mentioned before but I had a decent chunk in ratesetter, zopa and funding circle (and also wisealpha but they were OK) and lost money on all of them and had problems accessing cash at all of them. I am suitably terrified of them now and wouldn't dream of having money in them.
As far as I'm aware all bad debts in Ratesetter have been covered by the Provisions Fund so I'm not sure how you managed to lose money with them.Countdown said:
They are currently offering a slightly higher yield than FTSE100 stocks with the advantage of being more liquid (quick access, no transaction costs, no limits to deposits or withdrawals).
Quick access - NO, depending on the type of product you've gone for, you could wait a long time. Zero transaction costs - NO. You pay P2P lenders an amount to end a loan early, sometimes 1%. You also don't earn any interest on your first month with ratesetter...
Limits to deposits/withdrawals - IRRELEVANT there isn't on the stockmarket either.
The same risk of 'no guarantee of returns' applies to P2Ps too.
As I say, I've lost money with my P2P investments but you're right, it wasn't ratesetter and on reflection they were probably the best of the three. I shall edit my post.
Sa Calobra said:
When I looked at zopa for a loan (to me) it all looked Rosey and great assuring marketing for any investors. When I applied they asked for bank statements. At that point I declined to do any business with them and went to Sainsburys bank. Maybe they have a default issues if they are asking borrowers for such information?
I said on the phone you can see my credit file so why need sensitive account information'? That wasn't answered satisfactory.
I too applied for a loan, and was offered on the basis I sent bank statements etc. At this stage I declined the loan as I decided I didn't want it, yet I still received the money! No checks, nothing. I said on the phone you can see my credit file so why need sensitive account information'? That wasn't answered satisfactory.
Good rate tho.
I made the decision to withdraw my money from Zopa. I had a bit of an email exchange with them about my concerns of their abolition of the Safeguard fund and remain unconvinced.
I had 2 loans in arrears, now it's currently 1 with about £7 (out of £10) unpaid. With a few of those in the loan book, the slightly higher interest rate will not compensate for the loss. I presume after December they're going to lose quite a bit of deposits.
I had 2 loans in arrears, now it's currently 1 with about £7 (out of £10) unpaid. With a few of those in the loan book, the slightly higher interest rate will not compensate for the loss. I presume after December they're going to lose quite a bit of deposits.
johnfm said:
Not sure how 4.5% with capital at risk is safer than equities. I get circa 4% just in divi yields - and share price growth is a bit more than that.
I just couldn't be arsed with worrying about whether a bunch of small borrowers will default or not.
That's great for now, but what happens if a) The company slashes/decides to stop paying dividend and/or b) the market falls and your capital depreciates? I just couldn't be arsed with worrying about whether a bunch of small borrowers will default or not.
Both instruments come with their own risks.
g4ry13 said:
That's great for now, but what happens if a) The company slashes/decides to stop paying dividend and/or b) the market falls and your capital depreciates?
Both instruments come with their own risks.
The key issue is that in only one scenario you are being properly rewarded for that risk. Both instruments come with their own risks.
g4ry13 said:
johnfm said:
Not sure how 4.5% with capital at risk is safer than equities. I get circa 4% just in divi yields - and share price growth is a bit more than that.
That's great for now, but what happens if a) The company slashes/decides to stop paying dividend and/or b) the market falls and your capital depreciates? Now in my 30th year of equity investment.
Your comment Gary, is exactly what I have heard many people say over the years, most of whom have always kept their savings in cash, with building societies and banks. You will know what damage inflation has inflicted on that, during the past 30 years.
I have experienced both ceased dividends and capital value falls, but that is quite normal. If you follow sensible rules to minimise risk, long-term equity investment can produce amazing returns, particularly later on, when compounding really gathers momentum.
History shows that business activity has been the powerful wealth creator for the world. Equity ownership enables people to become involved in the very first stage of that process.
Edited by Jon39 on Thursday 19th October 11:52
sidicks said:
g4ry13 said:
That's great for now, but what happens if a) The company slashes/decides to stop paying dividend and/or b) the market falls and your capital depreciates?
Both instruments come with their own risks.
The key issue is that in only one scenario you are being properly rewarded for that risk. Both instruments come with their own risks.
Even if it IS a higher risk, for some people it fits their needs better. People can pay in and withdraw without any transaction costs. (Despite what Badda says, your loans mature at regular times throughout the month so it's rare that you would need to pay early termination fees). So if you have £20k working capital that you need to access within 30 days it's far better than a High Street bank.
Countdown said:
I think that's a matter of opinion. People keep suggesting that Ratesetter is higher risk than the FTSE. Yet it's been operating for 10 years+ and I'm not aware of anybody losing money.
Even if it IS a higher risk, for some people it fits their needs better. People can pay in and withdraw without any transaction costs. (Despite what Badda says, your loans mature at regular times throughout the month so it's rare that you would need to pay early termination fees). So if you have £20k working capital that you need to access within 30 days it's far better than a High Street bank.
What is the maximum upside with an investment in the FTSE 100 over day a year?Even if it IS a higher risk, for some people it fits their needs better. People can pay in and withdraw without any transaction costs. (Despite what Badda says, your loans mature at regular times throughout the month so it's rare that you would need to pay early termination fees). So if you have £20k working capital that you need to access within 30 days it's far better than a High Street bank.
What is the maximum downside over a year?
What about for Ratesetter?
Countdown said:
I think that's a matter of opinion. People keep suggesting that Ratesetter is higher risk than the FTSE. Yet it's been operating for 10 years+ and I'm not aware of anybody losing money.
Even if it IS a higher risk, for some people it fits their needs better. People can pay in and withdraw without any transaction costs. (Despite what Badda says, your loans mature at regular times throughout the month so it's rare that you would need to pay early termination fees). So if you have £20k working capital that you need to access within 30 days it's far better than a High Street bank.
If it's not a cheeky question, what do you expect to make on an annual basis from each £100 invested?Even if it IS a higher risk, for some people it fits their needs better. People can pay in and withdraw without any transaction costs. (Despite what Badda says, your loans mature at regular times throughout the month so it's rare that you would need to pay early termination fees). So if you have £20k working capital that you need to access within 30 days it's far better than a High Street bank.
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