Peer to Peer Update

I blogged earlier about my foray into P2P lending. This is largely based around Zopa, the "market leader" in the UK. More recent entrants include Quakle, RateSetter and Yes Secure. All these operate a market between individual lenders and borrowers, although with variations in fees, risks, rewards and, for want of a better word, styles. Different again is Funding Circle, in which I also have a (tiny) interest. This site deals exclusively with lending to small businesses, whereas the others concentrate on individuals, although Zopa does facilitate the occasional commercial loan.

Recently, rates on Zopa have fallen markedly. Over the summer it was possible to disburse money on the premium A* 36 month market for 8%, whereas now 7% is scarely possible. My last loan was for 7.2% towards the end of November. I am not prepared to chase down rates below 7% since, after fees, this becomes 6% before tax and defaults. Such returns no longer justify the risks and so I have not put any money into the markets for the last few weeks. For the moment, I am content to watch my 350 x £10 loans mature (or go bad). Over all the markets in which I lend I am currently making about 7.5% after fees and real and imminently likely defaults.

I actually can't be bothered to watch Zopa that closely (to judge from its message boards some people clearly devote a lot of time to its intricacies) so it's not obvious to me why rates have drifted down, but I suspect it's just a combination of more lenders pouring in and a small decline in borrowing. There is a theory that after Xmas, there will be a rise in people needing to consolidate their credit cards and hence a rise in demand. Well, we'll see.

Of more interest, perhaps, is the default rate. So far, I have one loan written off (and in the A market, too). Zopa reckon I might get 15% of this back, so I have lost, probably, £8.50 on that one. I have one loan that has gone into voluntary arrangement (A* market!) with reduced payments owing to job loss. As for the rest of the problem loans, there are just four late payers: two in the highest risk C market, one in B and one in Y (young). Having tracked the latter down on the Internet (it took but a few seconds), this one is the most likely, I feel, to default.

Assuming (not unreasonably) that all my late payers will default, my returns, so far, are still better than expected, but this will almost certainly change in 2011 as the reality of public sector cuts kicks in. Surprisingly, I have had not a single problem with the individual listings. This is the part of the system where people, often having been refused access to Zopa markets, make an appeal directly to lenders. Invariably, the essence of their pitch boils down to "I am very good with money. That's why I need to borrow some." Oddly, like a piece of dark chocolate, I occasionally succumb to these.

For me, Zopa is a bit of a toy. If rates rise I might put a bit more in, but I am chiefly interested in it as a microcosm of UK economic life. Unlike some Zopa lenders, I do try to obtain good rates and so I suppose I am not as altruistic as some. On the other hand, I suspect that many recent lenders simply see P2P as an easy high reward alternative to banks. These people are fools and they will discover a harsher reality over the next couple of years. Meanwhile, I'll continue to play quietly.