Money Lending for good returns on your investment

[munk]

Yes, it's done in the same way any legal money lending is done, namely if someone defaults on their repayments then they enter into an agreement with you to pay back the loan at an adjusted rate over time. All of that is handled by Zopa and the cost of it is covered by the fees that the customers (borrowers and lenders) pay. Presumably if they have to chase someone for money a lot / send bailiffs round / etc then they will pass on those extra costs to the borrower with penalties/extra fees.

[Seneku]

This looks very promising, but I noticed both sites are UK only. Is there an international/european alternative?

[TonyMarc]

First time back on the site for 6 months. Interesting to read this...

Oh...and happy new year to everyone.

[munk]

ED: Moved a bunch of posts about Zopa over to the Zopa thread.

Hi Tony, Zopa is pretty smart IMO... I've just been quite busy today sorting out my Zopa account / uploading more funds to lend out. (see other thread for Zopa stuff)

[TonyMarc]

Hi Munk. Yes I've opened up an account. Sick to death of leaving money in banks and getting a return of 3%...with inflation running at 5% + (if you believe the 'official' figures...time to try something new :-)
Do you have a large amount lent out? (albeit lent out to many 'lenders')

[munk]

Hi Munk. Yes I've opened up an account. Sick to death of leaving money in banks and getting a return of 3%...with inflation running at 5% + (if you believe the 'official' figures...time to try something new :-)
Do you have a large amount lent out? (albeit lent out to many 'lenders')

I know what you mean about savings accounts, pretty poor for last few yrs and not looking promising as long as base rate / inflation continue to stagnate. Think at one point recently the best deal savings wise was an index linked bond with National Savings (something like that?) which historically have always been looked down upon for their return on investment, kind of sums things up savings wise.

Re Zopa, I have about 700 loans active at £10/loan at present over 2 lending offers (one for 36 (60% of loans) and one for 60 (40% of loans) months) spread across the various markets with 50% in A*, 15% A, 27% B and rest in higher risk markets. I usually just deposit a lump sum every so often into each lending offer and then take my time lending it out, adjusting the rates every week so it's just outside the zopa for each market. Takes a while to go out but seems to be working out ok.

Thankfully not had too much bad debt so far, only 2 defaults in 800 loans (100ish are closed now, 700 active) with 4 I think it is in arrears or under arrangement (over 2 years that is, but still too early to count chickens since the first of the currently active loans doesn't mature until March next year so bad debt could easily go a lot higher). Probably more luck than judgement to be honest!

[TonyMarc]

Interesting to read. Many thanks.
What were the rating of the loans that went bad? ...where they any way expected? eg no return the previous month
Also what sort of % are/were you getting for each category (A+, A, B etc)
Do you get the interest and part of the principle returned each month?
Say if you were to lend out £10 over 60 months at a rating of B what sort of returns would normally be expected every month?

I have to say I've looked a Zopa's example and it doesn't seem a good example to show...:-P lol ...or maybe I've misread it :-P

[munk]

Interesting to read. Many thanks.
What were the rating of the loans that went bad?

One was A and one C I think it was (actually no just checked it was one A*36 and one B60).

The last couple of years have been pretty good for bad debt in terms of it being below the estimated rates. Prior to that though, loans written 3-4yrs ago, it was the other way around and the levels of debt were a lot higher than the estimates (I only joined in 2010 so have been lucky to have missed the slew of bad debts which were probably a knock on from the economic crisis that hit in 2007/8).

But going forward, who knows, if things carry on badly and people start losing jobs more regularly as the various cuts kick in, bad debt could outstrip estimates again...

...where they any way expected? eg no return the previous month

The way that a lender moves through the different payment statuses (paying/late/arrears/arrangement/default/etc) is on the FAQ site somewhere. I think a debt goes into arrears after 2 months of missed payments and into default after 4 monthly payments in a row and then it's passed to a debt collection agency. (edit: it is here).

Any time anything of note happens (like a missed payment), it's entered in the comments column of the loan book sheet you can download. For any lender that goes into default that column usually has at least a dozen entries in it with all the notes of the Zopa staff/info provided by the lender about the loan/why they can't pay/etc etc so you can generally get an idea of what's happening with the problem loans.

Do you get the interest and part of the principle returned each month?

Yes you get two entries per lender usually, one for capital and one for interest payments.

Say if you were to lend out £10 over 60 months at a rating of B what sort of returns would normally be expected every month?

The repayment entry in my statement for one 60m B £10 I have this month looks like:

Date Description Paid In Paid Out
06/01/2012 21:47 Interest payment from xxx 0.07260285 0
06/01/2012 21:47 Capital payment from xxx 0.12739715 0

the headline rate for that microloan (£10) was 9.2% on 24/10/11 when the loan was taken out.

I have to say I've looked a Zopa's example and it doesn't seem a good example to show...:-P lol ...or maybe I've misread it :-P

Well I think their interest rates are about the lowest there are on the market which is great if you're a borrower but not so great if you're a lender (there's a p2p lending comparison site out there that compares the different p2p lending sites on various factors). But on the flip side they seem to be very well organized and I've not had anything to complain about regards their administration of everything.


Generally though there are tons of gotchas that affect the 'real returns' apart from bad debt and fees in p2p lending which I must admit I have only just recently started to think about - ie:

• tax
• money sat on account idling whilst waiting to be leant out / not earning anything
• general misunderstanding of how zopa works viz it is not just a static x% rate that you are getting on £y and people setting rates incorrectly as a result of that misunderstanding (which in return lowers the overall rate for everyone else)
• 'winding up' time/cost if you want to get out quickly (I am not entirely sure to be honest but I think if you write a loan at say 5% and then want to sell it later using rapid returns, but the rate has gone up to 10% at that time, I think you end up incurring a cost in doing that)
• inability to write off bad debt as an expense for tax purposes (which is pretty piss poor given banks are allowed to do that and lower their tax liability)
• ... lots of other little things.

Right now it is getting pretty marginal as to how profitable p2p lending is as an investment. It was never stellar/always similar rates to long term bonds etc, but as time goes on and the base rate stays very low, the cost of borrowing generally comes lower and lower and it's at a point now where it's marginal whether it's worth doing.

ie right now the return after debts(0.5%)/fees(1%) for the current zopa (6%) on the A* 36 market is ~4.5% - even without taking tax into consideration that's lower than inflation. And the other markets are even worse in terms of having less liquidity / people wanting loans (so that excess of supply over demand implies lower rates). So at the moment it's a bit of a quandary whether to lower rates on the higher risk markets and hope that the bad debt estimates are overinflated, or just sit on the money and let it idle.

But... well it's just one egg in a basket of other eggs so to speak.

[TonyMarc]

Many thanks for your in-depth reply.
Think I'll give it a go doing microloans.

[DireEmblem]

This is something I need to look at proper, my average returns to date over the past 3 years have been 7% after bad debt, however my previous months lending rate has dropped below 6%.

This has definately provided me with better returns sofar than say an ISA or instant savings account, even taking into account my fees/bad debt, however I feel now that perhaps I should shift some thoughts over to looking into some of the high income funds, with monthly distributions to trickle any future spare cash into.