When the financial services sector (and most global economies) fell off a cliff in 2007/08, savings rates fell with them. Several years (and many interest cuts) later, I decided to take the plunge and invest some money with Zopa Loans. At the time, I wasn’t sure whether the company would survive or if I’d ever get that £100 back, but as weeks turned into months, and months into years, I came to see my money grow at around 7% a year.
What is P2P lending?
Historically, if someone (let’s called him James) needed money for something and couldn’t access it through investments, savings or regular cashflow, they had to turn to a lender. These could be friends or family, but for larger sums of money would more likely be a specialist lender like a bank or credit card company. In exchange for the cash, these firms would charge James 20% annual interest (in some cases even more), making borrowing from them an extremely expensive proposition, as for every £100 borrowed, James would have to repay £120.
P2P lending provided an alternative source of finance, based on the community. If James needs £1000 for a new boiler, he can turn to a P2P lender to raise the money for him.
The P2P lender takes the money from hundreds of thousands of savers across the country who are looking for a return on their cash. They lend it to James, and others like him, for a lower rate (say 10% a year), keep 3% for themselves and offer the savers 7% return on their money at the same time.
Cheaper for a borrower than traditional finance sources like credit cards and bank loans, and offering better rates of returns for savers than bonds and ISAs, the P2P sector revolutionised the industry.
Getting involved with Zopa Loans
My £100 was split into ten portions of £10 and lent to ten different borrowers. Some needed money for bills, others for home repairs, but all borrowers had a risk profile attached so that I could control my exposure to defaults. In theory, this diversification meant that all ten borrowers would have to default on their loans for me to lose me £100 – an unlikely prospect.
As time went by, the platform improved and my confidence in the company grew – several years later and as I’d still not lost any money, I decided to try withdrawing some. Unlike a bank account where you simply make a withdrawal request, I had to authorise Zopa to ‘resell’ my loans – until this had happened, I would be unable to withdraw my capital. If no one wanted to buy the loans, I wouldn’t be able to get the money back out until the loan had expired. Fortunately, demand was soaring for P2P loans with Zopa, and when the money hit my bank account a few days later, I decided to set up a monthly direct debit to start building the balance.
As of 2017 the company (and my money) still seem secure but late in 2016, I got an email which caused me some concern. It was a fairly lengthy email, which started as follows;
We’re making a change to new money transfers.
We always aim to lend you money out in a reasonably time. However, with current volumes of new money transfer combined with demands for loans seasonally declining in December, we don’t expect this to be achievable this month.
This industry is becoming well established – the UK’s P2P sector is one of the world’s oldest and largest, with money being invested by P2P lenders totalling more than £3bn in 2016, but as with any new industry, big changes are due as it continues to grow. This email basically told me that Zopa was struggling to find opportunities to lend my money – in the long term, this would drive down the return as I cut my rates to attract borrowers. In the worst case scenario (for me), I might be forced to offer such low rates of interest that the money simply wasn\’t worth lending out due to the risk profile of the investment.
What does the future hold?
The Financial Conduct Authority is due to launch a crackdown on P2P lenders like Zopa Loans. A report issued by the FCA indicated several concerns including customer misinformation and risk mismatching for unsophisticated investors. Alongside this, the email I received confirmed a concern I’d held for some time; too much capital.
LandBay, a lender specialising in property, saw originations plunge in 2016, and this email confirmed that supply of capital was starting to outstrip opportunities to lend it out. In world where savings accounts offer little more than 1% at best, a 5-7% return seems too good to be true. As more firms jump on the bandwagon, they’re likely to struggle to meet these returns, leading to failures of smaller firms across the sector.
My thoughts on Zopa Loans
Although I’m not qualified to give financial advice, I have some thoughts on Zopa Loans and the wider P2P industry. As a business, Zopa Loans has always treated me well, and I’ve never had any issue withdrawing my capital when needed. Despite this, I’m still not confident enough to put significant capital into the platform – the collapse of smaller players and clear signs of capital oversupply are enough to keep me wary for the time being.
As I was looking for an alternative investment, Zopa Loans has been a good place for my money – I continue to pay in my direct debit on a monthly basis, but am unlikely to transfer more significant sums in the future. I see it as a fairly solid opportunity, but wouldn’t lose sleep if the company were to go under – I wouldn’t miss the money in the account and am content to watch carefully from the sidelines for now.
As with all investments you’re reviewing; be cautious, diversify and always seek professional advice before committing your capital. If something doesn’t feel right, take your time and wait – there are always more opportunities to invest, but not if you lose all your capital!