Zopa can be a great way to beat the average savings account. You invest in Zopa, they lend your money to creditworthy borrowers and you get your money back with interest when the borrowers repay their loans.
So as a lender or investor, what do you need to know?
Q. Is my money safe at Zopa?
Yes and no. It depends on your definition of safe and how much risk you are prepared to take.
Zopa, like the two other big players in the peer-2-peer lending market are now regulated by the FCA (Financial Conduct Authority). This body regulates their financial practices and ensures that they are playing fair with customers, borrowers and lenders/investors.
That being said, any money invested with Zopa is not covered by the government FSCS scheme (Financial Services Compensation Scheme). That means that the capital you invest is at risk and while unlikely, if the worst were to happen you could possibly lose part or all of your investment.
Zopa have a fallback fund called Safeguard that deals with covering bad debts. In the normal course of events, some borrower loans will be defaulted on and turn into bad debts. The funds in Safeguard, which come from borrower fees, should hopefully cover the loss. However a long string of bad debts could potentially exhaust this fund, putting some of your invested money at risk.
With all that in mind, go into any dealings with Zopa peer-2-peer lending with your eyes open, know the risks and decide if that is a risk you are prepared to take. Don’t risk money you can’t afford to lose.
Q. How do I loan money on Zopa?
When you login to your Zopa account, click on Lend Money and it will show you the bank transfer details needed to transfer money into your Zopa account.
Log in to your online banking and make a payment using these details. The money will appear in your Zopa account within hours.
Note that any money transferred to Zopa will immediately join the New Money queue and will be queued to be loaned to borrowers. So make sure that you are ready to invest that amount immediately.
If you are unsure, maybe make smaller deposits regularly rather than large, one off payments and see how it goes.
Q. How do I withdraw money from Zopa?
You can get your money back out of Zopa but there are a couple of different ways to do it, both of which have slight drawbacks.
By default, the option to reinvest your Zopa monthly income (re-lending) is turned on. This means that when borrowers repay your loans, your capital plus interest is requeued to lend to other borrowers. This allows compounding of interest to meet the quoted Zopa interest rate.
If you turn off the re-lending option, also knowm as Auto Top Up, the monthly income will become available to withdraw from Zopa into your personal bank account.
The drawback is that your loans to borrowers may take 2-3 years from the moment you turn off re-lending for all of the monthly payments from borrowers to come in, so this option is not ideal if you need your money in a hurry. In other words it will take up to 3 years to withdraw all of your money from Zopa.
If you want to withdraw your invested money quickly from Zopa you can choose their rapid return option. Zopa will charge 1% of the amount to release your invested funds quickly like this.
When you request this rapid return, bear in mind that your money has been loaned out to borrowers. So the only way to free it up is for another Zopa lender to take over those loans to borrowers.
That being said, even with the additional 1% loss, the interest rate you receive should still be better than the average high street savings account.
What lending options are available with Zopa?
The answer is surprisingly few.
You can choose to have new investments and your reloaned money loaned out for 3 years or 5 years.
This seems like a poor option as it does not allow relending some money over shorter periods and other money relending on long loans. You have to pick one option and stick with it, at least in the short term. That seems a bit restrictive.
You can also choose to have relending turned on or off.
And that’s it! Compared to RateSetter this is a really poor set of options for lenders to manage their lending options.
On the other hand it is plain and simple enough for even the financial novice to understand. And this will perhaps suffice for most people who don’t want to be constantly monitoring and tweaking their loan terms.