2 August, 2017

Zopa Review: Loan Book Analysis

Zopa Review: Loan Book Analysis

The following article, Zopa Review, analyses Zopa (founded in 2005), the first peer-to-peer lending (P2P) platform to launch in the UK and globally. The platform allows investors to lend money to consumers seeking personal loans to purchase cars, consolidate debt or to fund home renovations.

Zopa has facilitated more personal loans than any other provider and in July 2017 had lent a cumulative £2.44bn, marginally behind Funding Circle’s £2.47bn.

Zopa currently boasts 60,000 lenders on its platform, with retail investors representing just over half of their volumes and institutions representing the rest. Zopa’s success in the institutional space has led to key strategic partnerships with the likes of Metro Bank.

Investors can choose between Zopa Core or Zopa Plus products, which is a reduction from the three investment product choices offered this time last year. The main difference between the products is the loan-types invested in, which results in differing expected rates of return. Previously, Zopa had three products: Zopa Access, Zopa Classic and Zopa Plus.

Zopa Core and Zopa Plus both have a minimum investment amount of £1,000 and offer “auto-bid” functionality, which means that your capital is automatically lent out in chunks starting at £10 to ensure your portfolio is sufficiently diversified. To access your money early, there is a 1% fee applicable on both products.

Zopa Review Fig 1.
NB: Statistics are correct at time of publication – 01/08/17

Zopa Core Zopa Plus
Rate 3.9% 6.1%
Safeguard Fund Protection No No
Early Access Fee 1% 1%
Minimum Investment £1,000 £1,000
Loan Type A*-C A*-E

Currently, retail investors are not able to access Zopa’s products due to high demand, but potential investors can sign-up online to be notified once Zopa are accepting capital again.

Zopa Review: Withdrawing Funds

During the loan term, Zopa investors will receive monthly repayments from borrowers. Investors can select whether their account should hold these repayments in their holding account, or whether to have them automatically re-invested in new opportunities (this is the default setting). Investors can withdraw money from their holding account at no extra charge and so if investors wish to withdraw their money at no cost they will have to wait until all repayments have been made. With loan terms up to 60 months on Zopa, it may take up to 60 months to receive all your capital and interest back, if you choose not to re-lend. The headline advertised interest figures assume that you re-lend your money, so if you were to turn this setting off your actual interest rate would reduce. Depending on the length of the remaining loans, it may be better to take the 1% hit and invest the funds elsewhere.

View Zopa's Platform Profile

To withdraw funds earlier than this, investors must sell their loan parts to other investors on the Zopa secondary market. Zopa charges 1% to sell loans parts on the secondary market. Although it is worth noting that this relies on buyers being willing to buy these loans, which under normal market conditions is highly likely, but of course there may be a circumstance in adverse conditions where this is not the case and you have to wait out the term of your loan.

Zopa Review: Net Returns

To estimate net returns, Orca has conducted loan by loan cash-flow analysis on every loan originated by Zopa.  An accurate estimation of actual net returns can be made for the years where 100% of loans are complete. As the maximum loan term on the Zopa platform is 5 years, loans as far back as 2012 are still in circulation and therefore at risk of default. As the years progress the percentage of assets (loans) under management increases, and the accuracy of net returns estimates decreases.

The chart below assumes that all assets under management complete as planned with all repayments made. No default estimation has been applied. The actual net return will therefore be reduced as loans progress through their term. You can see default rates in the next chart below.

Net returns prior to 2014 have consistently been above 5%, even during the 2008 recession. Post 2008, competition for borrowers was low, pushing up the weighted average borrower rates, even for prime borrowers.

Zopa Review Fig 2.

Source: Orca Platform

Zopa Review: Default Rates

Prior to 2014, actual default rates have been historically very low (below 1%), with the exception of 2008 (5.1%), 2009 (1.7%), and 2010 (1.8%). Between 2005 and 2014 borrowers were graded A-C, dependent on their risk profile. Since then, the company has introduced two new risk grades, D-E, for more risky borrowers. This has increased the estimated and actual default rates, as shown in the chart below.

Read more about Zopa's Operator Health

The actual default rates will continue to increase until all loans originated in a given year are closed.

Zopa Review Fig 3.

Zopa Review: Volumes

The amount a platform lends is important for two principal reasons:

  1. Credit Modelling: The more a platform lends the more data it has to build its credit processes. Effectively, the more experience a platform has at lending the better it becomes at evaluating credit risk.
  2. Early Access: To access your money early a new lender/investor must be available on the platform to fulfil your borrower commitment. The more the platform lends, the greater the probability of new lenders

Zopa Review Fig 4.

Cumulatively, Zopa has lent £2.44bn growing year-on-year since being founded in 2005. In the past four years we have seen significant capital on the Zopa platform, thanks, in part, to increasing institutional capital.

Zopa Review: Security

All Zopa loans are unsecured personal loans. The principal risk is a large number of borrowers default on their loan commitments. This may be a result of poor economic conditions or a reflection of Zopa’s underwriting performance. Zopa claims that investors are protected in three ways: a prudent risk policy, diversification and an effective recoveries policy.

Zopa has remained focused on lending to consumers and has built up 12 years’ experience within this asset class. This has allowed for a large volume of data to be gathered, which influences Zopa’s credit sanctioning process.

Borrowers must be 20 years or over, have a good visible credit history and be UK resident. Each loan is classified, A*-E, depending on risk. The Zopa Access and Zopa Classic products, invest money in a range of A*-C loans, while investors in the Zopa Plus product will see around 30% of their money being lent to D and E categorised borrowers. These D and E categorised loans carry a higher level of risk and higher return.

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The level of diversification Zopa offers is the principal protection afforded to investors. Your investment gets broken down into £10 chucks or up to 1% of the total amount invested. If you lend £1,000, which is the minimum you can lend, your exposure to one loan is 1%, therefore £10 chunks. If you lend £10,000 in one go, you will lend £100 chunks. Essentially, it is always 1% diversification.

If a payment fails, a Zopa representative will call the borrower and 70% of the time the borrower will be able to clear the arrears within a few days of the missed payment. If a borrower fails to pay after 30 days, Zopa may involve a debt collection agency. After 45 days the loan is considered to be in default and, P2PS Ltd, a subsidiary of Zopa which manages the Safeguard fund, takes ownership of the loan. In some instances, legal action may be taken.

Previously, Zopa offered two products, Zopa Access and Zopa Classic, which had the added security of being covered by the Zopa Safeguard (provision) fund. This meant that if a borrower misses a payment for four consecutive months the loan is considered defaulted. If you invest in the Classic or Access product this loss should be covered by the Zopa Safeguard (provision) fund. The ability for the Safeguard fund to pay out is affected by the amount of money in the fund relative to the level of bad debt. Following an update of HMRC guidelines, Zopa products are no longer covered by Safeguard. You can read more about this here.

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Zopa Review: Borrowers

Zopa’s borrowers are typically individuals wishing to borrow money to consolidate debt, purchase a car, fund a wedding or pay for home renovations.  Only individuals who meet the following criteria can borrow from the Zopa platform:

  • Identity confirmation
  • Be at least 20 years old
  • Have credit history that can be evaluated
  • A good track record of repaying debt
  • Be a current UK resident
  • Have 3 years of address history in the UK
  • Have an income of at least £12,000 per year

(this could be a salary or pension)

  • Be able to afford the loan

A major benefit of borrowing through Zopa is that there are no penalties for paying loans off early. This is very common on the Zopa platform with approximately two thirds of all completed loans being paid off early. If a loan is paid off early, this does not affect you as a lender as your funds will simply be allocated to another borrower.

The minimum, maximum and average loan are displayed in the table below.

Year Min. Loan Size Avg. Loan Size Max. Loan Size
2005 £500.00 £3,645.11 £14,500.00
2006 £1,000.00 £4,306.80 £15,080.00
2007 £1,000.00 £3,896.15 £18,280.00
2008 £1,010.00 £4,853.98 £15,100.00
2009 £1,100.00 £5,607.46 £15,120.00
2010 £1,120.00 £4,988.68 £15,130.00
2011 £1,100.00 £4,849.59 £15,190.00
2012 £1,100.00 £4,989.13 £15,190.00
2013 £1,040.00 £5,560.45 £21,550.00
2014 £1,010.00 £7,249.44 £29,640.00
2015 £1,000.00 £7,302.38 £29,640.00
2016 £260.00 £6,918.76 £29,990.00
2017 £260.00 £6,842.08 £29,970.00

Source: Orca Platform

Borrowers are required to pay their interest rate to lenders as well as a fee to Zopa, and an additional fee to contribute to the Safeguard fund. The weighted average borrower rate can be seen in the table below.

Year Min. Borrower Rate Avg. Borrower Rate Max. Borrower Rate
2017 2.42% 9.20% 31.62%
2016 2.49% 8.56% 31.03%
2015 2.14% 7.83% 24.75%
2014 2.00% 5.80% 25.70%
2013 3.50% 5.62% 13.90%
2012 5.12% 6.90% 12.09%
2011 1.00% 7.19% 13.32%
2010 1.00% 8.74% 15.19%
2009 5.01% 8.73% 18.20%
2008 4.85% 9.51% 18.53%
2007 4.30% 7.30% 14.33%
2006 3.90% 5.71% 13.40%
2005 4.40% 6.10% 14.00%

The weighted average borrower rate rises in 2007/2008, potentially in-line with an increase in risk during the Crisis, before dropping to a low in 2013/2014 when a low investor return of 4.5% was also experienced. The borrower rate has been increasing since then with the introduction of institutional capital and the more risky D-E grade loans. With the introduction of the Zopa Plus product these higher risk, higher reward loans are now being offered to retail investors.

Zopa Review: Conclusion

The availability of Zopa’s loan book has enabled us to run detailed analysis to better understand Zopa’s offering. The level of transparency exceeds what you could expect in other retail investment products and we wish to present this type of analysis to help investors and financial advisers make confident, risk-adjusted investment decisions. Want to find out more about Zopa? Read Orca's P2P Platform Profile.

Editor note: This article (Zopa Review: Loan Book Analysis) was originally published 5th August 2016, we have completely refreshed it to provide you with an accurate and comprehensive update.