Zopa becomes an even better prospect?

1 May 2013

Recent figures showed that lend to save has been enjoying a rise in popularity as investors realise the return from banks isn’t enough to wipe your nose on.

Now, lend to save pioneer Zopa has developed a new loan offering that even outfoxes the biggest downside of this type of lending- the risk of bad debts. Risk -free interest income at (almost) loan rates instead of inflation-eroded piffling deposit rates? Surely that’s not to be sniffed at.

The new type of loan is called ‘Safeguard’, and in simple terms, a proportion of the 1% Zopa fee is paid into a protected trust fund, which pays out if any of your loanees don’t. Risk-free return.

Of course there’s normally a trade off of risk and return, which means that the interest rates offered to investors under the Safeguard scheme may be lower than those currently available on the Zopa marketplace, as the Safeguard rates will track the major bank and building society loan rates. However, once the bad debt risk is ‘deducted’ from the expected return, it may be that the safer returns compare very favourably. In fact, using data from Zopa’s website today, there is only one category of loans where the Safeguard rate is lower than the unsecured rate.

Zopa classifies loanees into A*, A and B based on credit rating. New A* Safeguard loans will also be split by amount borrowed.
Zopa classifies loanees into A*, A and B based on credit rating. New A* Safeguard loans will also be split by amount borrowed.

The safeguard rate is also guaranteed to always exceed deposit rates by 1%, net of Zopa fees. There seems to very little downside for savers/investors. And those looking for loans should be happy too- by tracking the market, Zopa loanees should get a marketable rate, and removing the bad debt costing of the loan rates means that in most categories, headline rates will be lower for the new safeguard loans.

Of course, provisos regarding the suitability of lend to save as an investment, including lack of Government protection and risk if withdrawing early still apply, but even so, this looks like a good thing for investing and lending consumers.

Winners all round then. Except for the banks

5 comments

  • Mr M.
    I know nothing about this. Do you lend your own money, with all the risk if it's not safeguarded, for a shitty 3.9% interest?
  • Martin J.
    Selling loans as risk free...Hello! subprime mortgages...banking collapse etc etc... Is BitterWallet FSA registered to give financial advice?
  • spanks
    whats the FSA smart ass?
  • Alex
    I plonked some money on Zopa 3 years ago. I have made 7-8% return on it after losses so pretty good.
  • LondonAndy
    "This looks like a good thing for investing and lending consumers"? I think it is only good for ZOPA! Having a fairly large sum invested over the years I have never experienced anything like the default rates suggested by them - which means I was getting about 5.7% after fees and now I'll get under 5%.

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