My Zopa Spreadsheet
I have a spreadsheet written in Excel, that documents all of my Zopa investment.
What I find about Excel is that it is so illogical and nothing is intuitive. When I wrote a PC-based version of Artemis, that was a project management, spreadsheet and a graphics program, it was way in advance of Excel today for ease-of-use. But then it didn’t have all the features.
Am I being arrogant?
No! At my age and state of health I have that luxury.
On a more important theme, is the spreadsheet telling me what I should do with Zopa?
I think so and I’ll be making changes to my lending philosophy in the next few days.
Zopa Mentioned in the Guardian
My Google Alert for Zopa found this report in the Guardian. It’s not particularly relevant to Zopa or peer-to-peer lending as this extract shows.
Not all hairdressers are on one giant VAT dodge, otherwise there would have been some public outcry and we would all, by now, be doing each other’s hair (we would call it peer-to-peer grooming, it would be somewhere between Zopa and a zoo, and it wouldn’t matter what we looked like, because we’d all look the same).
But it does show that you should choose a unique name for your company.
Stability in Financial Systems
Adverts talk about get the strength of the insurance companies around you and you say that it’s as solid as the Bank of England.
I am a Control Engineer by training and one of the topics that is important is the concept of stability. Since I learned it all in the 1960s, the definitions have increased in scope a lot. I would describe a system as stable, as one that when you displace it, it returns to the same state of rest.
So as an example of a stable system, if you take a ball-bearing or marble in a typical kitchen bowl, it will lie in the bottom. Give it a small push and it will oscillate in and run round the bowl, until what friction there is returns it to the bottom. If however you balance the ball on say a football and give it even the tiniest push it will run off the edge. That is an unstable system.
In everything we do, we always should deal with stable systems.
So let’s look now at a small savings bank with a 100 branches or so.
Rumours are circulating that the bank has made a silly investment on say the 15:30 at Cheltenham and the horse fell at the third fence. Well, not really! But a banking equivalent!
So savers start to panic, as for many, it is the only savings they have. And when they panic, they withdraw their funds and put them under the nearest mattress. Or at least a metaphorical one!
So the problem goes round in circles, from more panic and withdrawals, until the bank has nothing left to pay out and goes bust. We’ve all seen runs like this on banks and hopefully we don’t want to see any more.
So are there any stable financial systems?
Current, deposit and savings accounts in reputable UK banks and building societies, could probably be considered stable up to a government-guaranteed limit of I think £85,000. It’s all laid out here. but then is it worth it for an interest rate of about 3%?
I have a strong feeling that Zopa, the peer-to-peer lender, is also a stable system. Other companies of the same type may well be too! but I am not as familiar with them as I am with Zopa.
Let’s look at an adverse event, that might affect Zopa.
Suppose another peer-to-peer lender gets involved in a mis-selling scandal or suffers a run because of some very bad publicity.
Let’s say this causes a lot of possible borrowers to look elsewhere. Now as demand has dropped, lenders, who are still keen to lend money, will drop their rates to account for the new situation. And then in turn these lower rates will entice more borrowers, thus restoring the system to where it started.
What actually helps the system become stable is that each lender has control of their own little feedback loop and as there are thousands of lenders, the system will adjust very quickly.
In a bank say, there will be one guy taking the decisions and they have a high chance of making a wrong one. All you need for a stable system, is for the average in something like Zopa to get it right. As Zopa uses a computer algorithm, every decision is taken according to the same rules.
You can look at other scenarios with Zopa and I haven’t found one yet, that doesn’t return to a stable position.
This stability could be your guarantee of a safer investment. I haven’t obviously got access to Zopa’s full data, but just like water finds its own level, a balance is probably struck between lenders and borrowers.
Zopa And A European Transaction Tax
There has been a lot of talk and some would say hot air lately from politicians about a European Financial Transaction Tax. This morning I heard on the radio, that such a tax would reduce the value of pensions dramatically, as every time your pension provider bought or sold a share or bond, you’d pay tax on it. It would probably mean that annuity returns would drop significantly.
On the other hand, if you look at Zopa, which gives me similar returns to what I would expect from my pension or annuity provider, I would hope they are outside of a European Financial Transaction Tax. Unless of course, the tax means that every time we make a transfer from our bank account, 0.01% goes to a central fund in the EU to bail out countries like Greece and Italy.
I would think that if any British Prime Minister allowed that, we would see riots, like we’ve never seen before.
So one of the advantages of an investment like Zopa, is that it should be outside any proposed European Financial Transaction Tax. On the other hand, this just might get the EU to make companies like Zopa illegal or ensure that every lender was registered with some new bureaucracy. Remember that a civil servant’s first duty is to create more jobs for others of his ilk.
So my advice to those who want to have a safe place for their savings, might find Zopa and the other peer-to-peer lenders, a safer place than stocks and shares.
An Excellent Comment on Banking
My Google Alert for Zopa found this today by Richard Heller on a web site called politics.co.uk. I particularly liked this bit, which is the author’s idea.
The banks should be compelled to offer all their customers a facility called a good neighbour account. The customer would receive a guarantee that all the funds from such an account which are available for investment by the bank would be lent exclusively to local people and local small and medium-sized businesses. They would not be lent to foreign dictators or racketeers and they would not be used to speculate in fantasy financial products which their bank cannot value or even understand.
The bank in question would not have to track its use of every single such account. But it would have to publish accounts to show that all the available aggregate funds in such accounts had at least been matched by aggregate local lending to individuals and qualifying businesses. There seems to be a market for this kind of lending, as witnessed by the recent growth of peer-to-peer financial institutions. Britain’s largest such company, Zopa, had its best-ever month in January. But no one has yet tried to bring the concept into a current account.
If demand for good neighbour accounts really took off, it could force the banks to revive the old model of Captain Mainwaring banking. The hero of Dad’s Army received money from local people and businesses in Walmington-on-Sea. He kept some of this in cash or at call. He lent the rest to other local people and businesses in Walmington-on-Sea. Captain Mainwaring, and others like him, helped Britain to finance the huge demands of the Second World War and then to finance a generation of recovery and growth. All this was achieved with the minimum of government regulation or support.
In contrast with the Mainwaring era, too many of Britain’s modern banks have been run by Private Walker, the spiv, or worse still by Private Pike, the stupid boy.
He mentions Zopa as nearest to this ideal of banking, which certainly our parents would have recognised.
Zopa of course has paid me a lot more in interest, than ever I would have got from a reputable bank.
The Reliability of Zopa
Every morning I check the status of my Zopa and normal bank accounts.
Zopa was fine today, but my bank account was inaccessible for routine maintenance from midnight yesterday until eight this morning.
It got me thinking that I don’t think in the over four years, I have used Zopa, I’ve never not been able to access the system.
To be fair though, I have hit a couple of bugs in the past, which have resulted in say the system hanging until I have logged back in, but I certainly haven’t had a problem in the last couple of years, when my use of the system has been heaviest.
So if you worry about Zopa’s reliability, I’d say it’s probably up there with the best financial institutions.
On the related subject of fraud on Zopa, I found this article on the web. The writer makes a lot of sound points.
Is Now The Time To Invest In Zopa?
I ask the question as I was at Zopa‘s seventh birthday party and some of their people said, they needed more lenders.
If that had been said by many, you’d have smelt a rat, but I have been feeling for some time, that the value of loans wanted has been growing in size compared to the amount of money on offer.
So I have just been looking at the figures in my Excel spreadsheet that I use to track the company. In January 2011, the ratio of money offered across all markets to that demanded was 4.74. In February 2001, the ratio was 2.78. By comparison in January and February this year the two figures are 1.79 and 1.35. So the amount of money on offer has dropped with respect to demand over the last twelve months.
The drop is totally due to the rise in demand. The average demand in January 2012 was £12.19m, as against to £5.46m twelve months ago. This is a rise of 123%, whereas the money on offer has actually fallen. This could be for any number of reasons, but my guess is that because of the recession, more people are withdrawing repayments and interest, rather than reinvesting them.
So it would appear that Zopa has a bit of a funding gap for new loans.
Also. on the positive side the interest rates returned to lenders have also stood up well and if you take the A* market, this has hovered around the 7% mark since January 2011.
What is interesting and might frighten some investors is that there are occasional monthly fluctuations in the figures. For instance in November and December 2011, rates dropped, but had bounced back by the turn of the year. This probably explained by a slight lack of demand and an increase in money offered. Could savvy investors be putting their Christmas bonus in a safe place?
If I look at my bad debts over the last year, they have gone up by about £80 and 10 contracts. As I limit my exposure on any contract to £50, it is unlikely I’ll get any big hits of a hundred or so, I got in the early days.
So what are the rules for investing?
- Start slow, with investing something you could totally afford to use. I recommend a hundred pounds or so, until you have fully learned how to use the system.
- Concentrate on the two most creditworthy markets; A* and A. The rates you will get aren’t as high as in other markets, but they are less risky. I have a small proportion of my money in the Y or youth market, where 5 contracts have gone bad. But then 6 have in the A market, although these are obviously out of a lot more contracts.
- Set a maximum lending limit for each customer of £50.
- Check your account daily to make sure that the rates you are offering are in the zone or the Zone of Probable Agreement as Zopa calls it. If your rate is too high, no-one will borrow from you and if it’s too low, you might get less creditworthy customers.
- Join the forums on the site, to learn how others think and act.
- Only when you are happy with the system and can trust yourself, do you add larger sums of money to your lending pot!
If You Have a Good Credit Rating, Why You Should Borrow From Zopa
I trawl the web for Zopa-related articles and found this one; entitled Nearly half of Zopa loans repaid early – all free of any penalties. Here’s an extract.
Online peer-to-peer lender Zopa today confirms that since it launched in 2005, more than 45% of the loans due to be repaid so far have been repaid early and all without the borrower paying any kind of additional fees or charges.
This is in stark contrast to the banks, as not one offers a personal loan without additional early repayment charges – often of one or two month’s additional interest.
It also goes on to quote extensively from the CEO of Zopa.
In almost all circumstances, it makes good financial sense to pay off your debts as quickly as you can, including any personal loans. But banks stand in the way of this by including early repayment penalties in their loans which put people off from doing the right thing. We think that is fundamentally wrong.
So it would seem if you have a good credit rating, Zopa will give you a loan and you feel you might be able to pay the loan off early, then Zopa is one of the best plsces to borrow the money.
But just as they will check you out, then you should do that too! The easiest way is to sign up and join their discussion pages. Can you do that with your bank?
Early Repayment Rules for Student Loans
Traditionally, there has generally been a penalty for early repayment of loans, but some of the new ethical online loan companies, like Zopa use no penalty as a selling point. So do Wonka, who I wouldn’t normally describe as ethical. Even Nationwide charges an extra 30 days interest if you settle your loan early.
So for the student loan companies to charge would be going against what is now accepted as normal and back to the bad old past, where early repayment was a major part of a loan company’s profits.
As this seems to have been a Liberal Democrat idea, who are supposed to be forward thinking or at least not backward, you can read what you like into the proposal.
I don’t need to borrow money, but if I did, I would always do it from a reputable company, that had no penalty for early repayment.
QE is Bad For Your Pensions
I don’t mean dear old Liz, as I think the longer she lives, the better it will be for the economy and my pension. But the link is the opposite with Quantitative Easing, which according to several commenators will mean that long-term annuity rates will fall. This article is from CityWire. Here’s an extract.
On the one hand there has been uproar from some experts about the impact on people’s pensions. This is because QE is used to buy back government bonds, or gilts, which reduces their yields and in turn lowers annuity rates, which are linked to gilts and which determine the amount of pension many people receive.
However, others argue that annuity rates were already dropping before QE begun; that while we are hostage to the broader economic backdrop which includes QE, the eurozone crisis is what really matters. ‘It’s the broader backdrop that is most relevant,’ said Tom McPhail of Hargreaves Lansdown.
It doesn’t look good does it. I suppose I could put in a stove that burned paper and just put my pension in it, a bit at a time. I would at least be warm.
On the other way, I’ve sort of created my own annuity using Zopa, where I put the money I got from selling C’s Boxster.
The Anonymous Widower 