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"Ethical loans" from Zopa?

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As a lender, your maximum exposure per-borrower is £10 so that's the maximum you can lose per-bad loan

 

You can also choose which markets you want to lend to, for example, people with bad credit are more likely to default but will pay a higher rate on the borrowed money. People with excellent credit rating will pay less interest but are very unlikely to default. You can spread your lending or focus on safer or less safe borrowers

 

Your funds are spread across multiple loans though right? So a couple of loans turning bad shouldn't actually cost you a huge amount, is that correct?

 

What credit worthiness group were you lending to? The lower rated groups offer higher returns, but obviously have a higher risk of problems.

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Your funds are spread across multiple loans though right? So a couple of loans turning bad shouldn't actually cost you a huge amount, is that correct?

 

What credit worthiness group were you lending to? The lower rated groups offer higher returns, but obviously have a higher risk of problems.

 

Exactly right. My Zopa money is lent out in £10 lots, so no borrower has more than £10 of my money. I also only lend to the A* group which is the highest credit rating with the least likelihood of default.

 

Lending to groups with less credit worthiness brings in a higher rate of interest just because there will be more bad debts. Theoretically you end up with around the same rate of return whichever group you lend to.

 

Here's the rate of returns from their site (before bad debt) -

 

http://uk.zopa.com/ZopaWeb/public/lending/great-returns.html

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Your funds are spread across multiple loans though right? So a couple of loans turning bad shouldn't actually cost you a huge amount, is that correct?

 

What credit worthiness group were you lending to? The lower rated groups offer higher returns, but obviously have a higher risk of problems.

 

I know all about it Cyclone. I was lending to hundreds of borrowers on Zopa at one point.

 

I went for the top rated groups. Two loans went bad so I was almost £20 down. The first year was ok but they went bad in the second year as the economic environment started to deteriorate. I took a judgement that the number of bad loans would increase and my calculations seemed to show that NS&I was a better and safer bet.

 

A couple of other things for people to consider:

 

1. Your money is not covered by FSCS

 

2. The tax situation is a bit strange and not at all clear. Returns are paid gross so you have to make sure you include it on tax returns, or if you are on PAYE send your Zopa statement in to HMRC to get your tax code adjusted accordingly.

 

3. If you want to invest large amounts once you hit a certain level you have to obtain a Consumer Credit Licence - at about £25,000+ you effectively become a professional money lender.

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As a lender, your maximum exposure per-borrower is £10 so that's the maximum you can lose per-bad loan

 

You can also choose which markets you want to lend to, for example, people with bad credit are more likely to default but will pay a higher rate on the borrowed money. People with excellent credit rating will pay less interest but are very unlikely to default. You can spread your lending or focus on safer or less safe borrowers

 

You can lend more than £10. Zopa recommend not lending any more than 2% of your total funds though

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I know all about it Cyclone. I was lending to hundreds of borrowers on Zopa at one point.

They were questions, not statements. I wanted to confirm what I thought I knew.

 

I went for the top rated groups. Two loans went bad so I was almost £20 down. The first year was ok but they went bad in the second year as the economic environment started to deteriorate. I took a judgement that the number of bad loans would increase and my calculations seemed to show that NS&I was a better and safer bet.

Fair enough.

 

A couple of other things for people to consider:

 

1. Your money is not covered by FSCS

 

2. The tax situation is a bit strange and not at all clear. Returns are paid gross so you have to make sure you include it on tax returns, or if you are on PAYE send your Zopa statement in to HMRC to get your tax code adjusted accordingly.

 

3. If you want to invest large amounts once you hit a certain level you have to obtain a Consumer Credit Licence - at about £25,000+ you effectively become a professional money lender.

The law was changed to allow limited companies to lend though if it wasn't there primary business, so I'd do it that way, everything is gross when it comes into my company account, and the accountant has it all to sort out.

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They were questions, not statements. I wanted to confirm what I thought I knew.

Fair enough.

The law was changed to allow limited companies to lend though if it wasn't there primary business, so I'd do it that way, everything is gross when it comes into my company account, and the accountant has it all to sort out.

 

For anybody interested in the tax situation there is a load of helpful info on Zopa and also on the Zopa forums. It does fry your brain a bit though, especially the ins and outs around bad debt, not being able to write it off etc...

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Using a company to do the lending (so long as it's not it's primary business) has the advantage that any loss can be written off.

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Using a company to do the lending (so long as it's not it's primary business) has the advantage that any loss can be written off.

 

That may be but the vast majority of Zopa lenders are individual small investors with a relatively low investment. It's not a viable to set up a company solely for making small investments through Zopa. If on the other hand you have a company already then not a bad idea.

 

My point about writing off bad debt is just an example of how Zopa looks simple on the surface of it but can become more complex once you get into it.

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It's not, and not just because of the cost of setting up a company. If the primary business is lending then it needs to be licensed, when I first checked any lending at all would need that license (they emailed me sometime later to say that this had changed). The license costs about £500, meaning you'd need to lend a huge amount to make it worthwhile if it were you primary business.

It's still worth considering for any small business owner though, most business accounts currently pay the grand rate of 0%. If you can commit to fixed term bonds you might manage to find 2.5%, which is still pitiful, so putting some of your funds into Zopa is an alternative to consider.

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