Alternative to Zopa

If you want hands off with protection fund and shield ie unemployment and sickness cover for the borrower. Definitely try Lending Works. Alot Better rates than Zopa.  Zopa has no protection fund and in my experience defaults are still high in both Core and Plus.

LW like RS has no losses until the Fund runs out of money and all hell breaks loose. LW has repeatedly had higher defaults than expected but mysteriously they expect the ongoing loans to do better than expected to leave plenty in the fund. We will see. With Zopa WYSIWYG. Losses happen 4 months or so after payments cease, there is no teeming and lading with estimates to move bad news that crystallised earlier to hit later when the losses are certain. I have retained some money in Zopa as I fear LW and RS might well fall together, so yes the expected returns are much better, but so are the likely losses in a downturn.

- PM 

I agree with most of what you've written, but not the conclusion. I don't see why losses would necessarily be worse at RS and LW than Zopa. I think that a credit event would cause severe liquidity issues for RS and LW, but don't see why they would suffer bigger losses. My personal feeling is that the compulsory insurance at LW would result in them holding up rather better than the other two; hence, I'm withdrawing from Z and RS but remaining in LW.

Forgot to add loanpad. That would end badly as well if a credit event occurred. But lending works should survive if properly managed.

IMV, if the insurance was a significant consideration then we'd already be seeing significant improvements in the provision fund claims for past years as insurance claims begin to pay out.

What we actually see is that the shield utilisation (presumably including recoveries from insurance) by year for 2015 was 211.5%, for 2016 241.1% (!) and 108% for 2017. Those are pretty scarily high figures in my view. This isn't some trick of the light either - bad debt for 2016 was estimated at the outset as 3.3% but is currently running at 5.4% with further arrears of 0.4%. Remember - these are the stats in years when the UK economy was nominally performing well. Just imagine..

The one consolation I take with LW/RS's current performance is, in my opinion, losses from a resolution event shouldn't be anything like it would be for the higher risk lenders. Barring the totally unforeseeable (e.g. fraud), then I can't see capital losses being too significant, if still very real. This is the only reason I haven't backed out entirely to date, as I'm willing to throw caution to the wind for a while longer. I am personally letting investments in both run down for now though.

I don't think that's true. I haven't analysed the whole loanbooks, but for the last 10 live loans in each: Kuflink's LTV averages 57.60%, CP's LTV averages 55.94%.

Rightly or wrongly I believe that RS / LW will manipulate estimates to demonstrate that theior PFs are solvent long after it is extremely unlikely that they are. As a result the actual haircut required to truly make them solvent once acknowledged will be large. Assuming that the impact is to largely curtail any new lending, the total deficit will need to be paid on the loans outstanding at te date that the credit event is triggered. This will need to cover a liquidity buffer for the maximum difference between inflows and outflows (or take a further hircut from a forced sale of future income).

At Zopa much of the costs of previous bad credit decisions will have already occurred and so the impact of a sudden worsening will be much less (no restatement to reality required). In addition Zopa lenders are used to bad debts and so are likely to respond more understandingly to increased defaults. i believe LW & RS lenders will run to the hills when any significant formal haircut (ie more than the margin widening currently being implemented) occurs. If LW or RS do stop lending new money, I think it is likely that administrators are likely to be involved. They are likely to be ultra cautious and so impose a larger haircut than the company themselves would have done. I believe that a reduced Zopa will survive all but the most catastrophic scenarios, not so RS & LW.

Will be overall impact on overall returns be lower at Zopa? Possibly not (although it will by the increased costs of the curtailment), although I think the transparency will have made Zopa more realistic that RS/LW on default predictions and therefore lead to earlier tightening of credit (not to mention some institutional memory of 2008). Re insurance, a nice to have, but without some indication of terms / experience of payouts, I do not assume that this will help materially.

JMHO

- PM