Welcome to our Lender Rates series - giving you more insight into how we get to our headline rates, the differences between types of rate, and the various factors that influence them.
Before we begin, a couple of quick refresher points: Zopa lends money in consumer loans, meaning your money is lent to individuals, not businesses. Money lent out is typically used for home improvements, new cars, weddings, etc, and the maximum we’ll lend out to any individual borrower is £25,000.
We’ve also been around for 12 years, and during that time we’ve maintained some of the lowest default rates in P2P. Why do these things matter? Well, our rates are tied to our borrowers, and Zopa has strict criteria borrowers must meet before we’ll lend to them: enabling us to offer competitive and sustainable rates to our lenders.
We’ll go into more detail in subsequent posts, so this one should be treated as an overview of lender rates and their subtle differences.
Headline rates:
These are the projected rates we (Zopa) advertise for our three lending products. These rates are annualised and are predictions based on our current view of the market, so they’re subject to change, and aren’t guaranteed. We’ll always try and give you a few days of notice if we do change these significantly.
They factor in any fees Zopa charges borrowers, so no nasty surprises there.
They also take into account principal losses from defaults. For each of our risk markets we calculate a percentage of defaults and consider that in our headline rate predictions. So even if you do have a defaulted loan, and aren’t covered by Safeguard, you should still expect to be on target for the headline rate, over time.
The headline rate is especially useful when you’re comparing Zopa lending products. As we said earlier, all of our headline rates are annualised, which makes them a lot easier to compare.
Lent out rate:
This is your actual, real time rate, and might not match the headline rates. This is because of how we match your money to borrowers. We split your investment into microloans which each get matched to different borrowers with different rates. That’s why we recommend putting in £1,000 initially: to diversify your investment across different rates to better target the headline rate. Depending on your mix of risk markets, the results can vary. The rate is calculated by working out the average rate of all your small loans.
Again, these rates factor in any fees we charge borrowers.
However, they do not take losses into account: this rate shows you how much you are waiting to receive from borrowers’ monthly repayments. If a borrower defaults, but you have Safeguard, then after four months of missed payments the fund steps in and repays you missed interest and capital.
For Plus customers, we have an additional rate to your lent out rate: your projected annual return (capital weighted against average loan interest rate minus expected principal loss and any fees).
This rate is useful if you want to track your investments and how they perform on a daily basis.
Earnings:
On your Lending Summary you can see your all time Zopa earnings, and your statements display how they have performed month to month. Your earnings show how your investment has performed over time, and the amount you’ve actually earned with us.
Rate construction
There are a multitude of factors that can affect the rates we offer, and these have different causes and level of impact. In another post, we’ll take a closer look at the construction of our rates.
As always, our customer services team are available to answer any questions you may have around our rates and your investment’s performance. You can also check our FAQs at any time.
And remember: when you lend your money your capital is at risk and is not protected by FSCS. Our risk statement has all the details.
This post has been updated from the original of July 8th, 2016.