Zopa Review – A P2P Experience (Updated July 2020)

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Summary of Zopa Review: Founded in 2005, Zopa was the first P2P lending platform to launch in the UK. Notably it is the only one that has lived through an economic downturn. This should give investors some reassurance about the viability of the platform. However, a relatively recent change has seen its products change. The previous accounts which were protected by a provision fund no longer benefit from this. With interest rates lower than their competitors, their key selling point is their track record.

Here is a table comparing Zopa with similar platforms of its type, which deal in unsecured personal loans.

PlatformLinkTarget Rate (%)My XIRR (%)StatusLive Rating
Zopa Review - A P2P Experience (Updated July 2020)Review3.0%-5.0%6.51%OPEN3.5/5
Zopa Review - A P2P Experience (Updated July 2020)Review4.5%-5.2%4.58%OPEN3/5
Zopa Review - A P2P Experience (Updated July 2020)Review3.8%-5.4%5.74%OPEN2/5

What is Zopa?

Zopa (standing for Zone of Possible Agreement) holds the distinction of being the first true peer-to-peer company. There was a time when interest rates were high, prior to the last financial crisis. Then, it offered less than perfect borrowers loans at lower rates than the banks. There was also upside for investors: the opportunity to earn better returns than savings accounts. The rate was dependent upon the riskiness of the borrower.

The model proved to be a success even during the financial crisis. The product gained popularity among both borrowers and lenders. The subsequent interest rate crash to almost zero rates also helped Zopa (and other P2P lenders). Interest rates on savings accounts quickly dwindled, making their products more attractive by comparison.

Zopa pioneered the of aggregating lender funds and splitting them across all loans. In this way an investment is split across multiple loans on the loan book. This gives an element of safety in that a single default has a less pronounced effect.

Zopa’s intentions stretch beyond P2P. It has acquired a banking licence and intends to offer a digital challenger bank soon. Whether this offers any advantages for investors remains to be seen.

Here is a table of all Zopa features:

Established2005
Advertised ReturnsUp to 5.2% (Plus)
Loan TypesPersonal
Loan SecurityNone
Minimum Investment£1,000
Cash DragSmall
Secondary Market?No
FeesNone
Provision Fund?No
Auto Invest?Yes
Available in ISA?Yes
FCA Authorised?Yes
Active on forum?No
Sign-up offers?Up to £200

As we can see companies offering a similar product are Ratesetter and Lending Works.

Are Zopa profitable?

Zopa is a trading name of Zopa Limited. This company was incorporated in 2004. The last accounts were filed on 8 October 2019 and cover the period of 12 months to 31 December 2018. These accounts show that profits have been marginal here, with an operating loss of £3.618m being balanced out by an asset disposal and tax credits.

It may be the case that as one of the most mature P2P lending platforms, Zopa should be profitable by now, but other goals have come into play, specifically the setting up of a banking division. Staff costs have risen sharply in the last year although the banking division is a separate company.

There appears to be less risk here than at other companies. There are accumulated tax losses of over £5m still in use, and the parent company received almost £50m from share issues. It does appear that once the bank launches, an IPO is highly likely. For the purposes of this Zopa review I have only given a quick look at the accounts, so this represents an opinion only.

What’s the Zopa sign-up offer and how does it work?

Currently there is up to £200 available for new sign-ups which works as follows.
If you invest £2,000-£4,999 = £20 cashback
Invest £5,000-£9,999 = £50 cashback
Invest £10,000-£14,999 = £100 cashback
Invest £15,000-£19,999 = £150 cashback
The top level of £20,000 = £200 cashback
(Other t&cs apply, and you can sign up here)

Zopa Operating Model

Zopa only offer one type of loan: unsecured personal loans. These are typically used by borrowers for a variety of purposes such as home improvements, car purchases or even debt consolidation. Loans are generally for smaller amounts up to £25,000 and up to 5 years. They amortise, so you will receive a portion of capital plus interest into your account every month.

In the past there was a greater deal of flexibility on how investors accepted risk. There was a grading system ranking borrowers by their credit risk. Choosing to loan to a higher risk borrower generated higher returns. Nowadays Zopa has consolidated its products and there are only two: Zopa Plus and Zopa Core. There is not a great difference between the rates (at time of writing, Core projects 4.5% and Plus 5.2% after losses and fees). This reflects that the Plus product takes slightly riskier loans.

The only other choice as to regarding investing is whether you want your interest repayments to sit in your cash account or to be automatically re-invested (in the same product where they came from). It would not be possible to choose what particular loans you would want your money invested into.

Coronavirus Changes

Like most platforms, there have been changes due to the pandemic. Zopa’s reaction has been to cut lending to the riskier loan categories, and increasing the interest rate on others. This in theory has the effect of keeping loan rates the same. The general uncertainty has seen a large range in projected return rates. Zopa Core is now between 2.3-4.3% and Plus is 2.4-5.6%.

Another thing to be wary of is that Zopa have granted borrowers reduced payment plans or payment freezes. These are for an initial 3 months and could be extended. A default is only classified as such after 4 months of arrears. It could be the case that bad news is postponed for quite a long time.

How are funds protected?

Zopa offer unsecured personal loans, and as such there is no underlying loan security. Unlike other platforms such as Ratesetter or Lending Works (who also offer the same type of loans) there is no discretionary provision fund to compensate against bad losses. There used to be one in the past. This only covers loans made when it was operating and as such will be phased out.

Instead, Zopa state they provide protection of funds by superior loan selection and management (this is a common boast). In common with many platforms, they diversify investments across many loans. This means that all investors share in the good times (as well as the bad). This approach works if defaults are contained to low levels. So far it appears that this is sufficient to not cause lenders any capital loss, at the expense of a larger upside.

Zopa Review: Pros

There are many things to like about Zopa:

Long track record: It has been said a few times, but Zopa outdates all P2P platforms. This must have resulted in some insights on how to survive a financial crisis and reducing platform risk.
Hands-off experience: The simplicity of the product has made it one of the easiest to operate. If you have your money on auto-invest and not topping up the account there is no real need to check it as payments are automatically invested.
High liquidity: It is apparent that many borrowers use Zopa, who offer rates lower than others. This transfers into demand for money on the platform, transferring into less cash drag and quicker cash-outs.
Transparency: Zopa are very transparent about where your money has gone. You can download your personal loanbook, from which is possible to reconcile the figures on your dashboard.

Zopa Review: Cons

There are also a few things to dislike about Zopa:

Lower Interest Rates: Loan interest rates lag behind that of Ratesetter/Lending Works by some distance considering the loans are broadly similar. This is unsurprising in some ways because Zopa appear to offer lower interest rates to borrowers, but could also be indicative of a higher fee schedule being charged.
No Provision Fund: Zopa’s loans no longer carry any protection against loss, unlike others. Whilst no reliance should be put upon a Provision Fund, in the case of Ratesetter the funds are segregated. Demonstrably this is used for the purpose of compensating lenders. It is therefore slightly irritating to have to see defaults within results, when you would not do with other platforms.
Small Premium for Plus: Considering there are more riskier loans in the Plus loans, the risk premium of 0.7% is too small for me and not sufficient compensation.
No choice on loan length: Unlike Ratesetter, there is no choice of which loan market length. Whilst a variety of loans lengths are used, there is no equivalent product like the rolling product, and early withdrawal costs a minimum of 1% plus interest rate differential. Zopa is not a place if you need instant access.

Zopa Review: My Strategy

I use Zopa mainly as diversification, as their ‘Plus’ rate isn’t quite up to the returns seen elsewhere. The Core rate is probably equivalent to other instant access accounts (corrected for defaults). I tend to favour the Core product and use auto-invest so that no checking is required. As long the investment period is greater than a year there should be a return here even if you did require the money back after this time.

CONCLUSION

Zopa’s track record speaks for itself: it has a long history of providing a decent product for both borrowers and investors. That said in recent times the investor product has slightly deteriorated in the form of the removal of the provision fund and reduced interest rates. Other platforms have improved on its returns, but Zopa is still a useful investment to have for diversification purposes.

Disclaimer: This Zopa review represents my own opinions and should not be substituted for investment advice. Please research before you invest with any firm. Typically P2P investments are not covered by the Financial Services Compensation Scheme (FSCS) in the same way bank deposits are. There are no guarantees that you will receive the returns advertised (or even a return at all).

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