Post by Deleted on Aug 14, 2014 12:57:36 GMT
Zopa is an interesting one. Many people are put off or frustrated by the way the interface works: it can seem as if nothing's happening for weeks and then you get a monthly update which is at first incorrect, then rights itself in a few days.
For the first few months using the site, this can definitely be off-putting, but you have to realise these people are trading at a vastly higher level than most of the other platforms. It's many hundreds of millions we're talking about.
So don't worry that they're spending their money making you money rather than making the interface lightning-fast and responsive to complex account calculations.
However there are some genuine problems and while they shouldn't necessarily put you off, they're worth being aware of.
First and foremost this is a platform for debt-fuelled consumer spending!!!!!!!!
Economies grow when people defer consumption and favour saving and investment. When someone borrows money in order to spend more today, they're going to have less tomorrow in order to pay back the loan. The future always suffers.
So what happens in the long run? Well obviously Zopa is a tiny tiny part of the consumer borrowing market so they're not *responsible* for the direction of travel society's taking but by lending, you're committing to up to five years of a future you should rationally expect to be poorer than the present, at least for these particular individuals.
Even if you're hugely optimistic about "the recovery"(LOLOLOL) and see no problem with the bubbles in the stock market, the gilt bonds market and the housing market (which an optimist will regard as 'investment' rather than consumer's goods subject to vast ongoing inflation), you will still rationally view an individual taking out a loan today as being worse off for the next few years. It's a bet that they won't want to spend as much next year, the year after, the year after that or the year after that. Hmmmm. People who want stuff NOW NOW NOW are going to take it easy in the future. Ok.
So that's the main problem, but the other big problem is one facing us as lenders: moral hazard.
We get our 5.2% no matter how many borrowers pay on time or at all. Why should we scrutinise our loan book therefore? Who cares what the default rate is, when we're guaranteed to get our money no matter what?
On top of that there's all sorts of guarantees and reserve funds and so on.
So how's that a problem? Surely(DING!) safety's better than risk? No, emphatically not.
"Protected" industries are a time bomb: they're fine until they're no longer fine, then they're horrible. If the company ITSELF ends up going bankrupt precisely because of having to absorb the debt of the borrowers, there's no bail-outs for you then! (Or if there are, if let's say we end up like the high street, subject to FSCS promises: how is impoverishing the general public better in the long run? You'll get your money but nobody will be able to trade with you.)
But but the company will control things: ok so a million lenders aggregate their risk into a single strategy. Is that really better? What if our infallible directors are hit by an unexpected surprise? What if, for example, some governmental intervention results in half the borrowers defaulting overnight? What if hyper-inflation hits and the rates are no longer any better than the payday lenders? What if there's a bank run!
No you're better off managing your own risk.
So am I saying don't touch Zopa? Not at all, I think it's good. Where else will you get what amounts to a sound money retail bank account paying the normal market rate or thereabouts? Compared to ISAs and the bonds offered by banks, this is much much better. The company sees itself as a pragmatic alternative to credit cards and that's laudable. If we can't stop people borrowing through persuasion and we don't want to stop them through force, providing a better means is a good practical improvement.
Just be mindful of how destructive consumer borrowing is when deciding what priority to give this type of thing in your P2P portfolio. ("Underweight" it in other words.)
And be mindful of what's actually going on when the guaranteed rates change (and even when they don't): the timing of your exit strategy could be very important in an area exposed to the vicissitudes of the business cycle.
/endrant
For the first few months using the site, this can definitely be off-putting, but you have to realise these people are trading at a vastly higher level than most of the other platforms. It's many hundreds of millions we're talking about.
So don't worry that they're spending their money making you money rather than making the interface lightning-fast and responsive to complex account calculations.
However there are some genuine problems and while they shouldn't necessarily put you off, they're worth being aware of.
First and foremost this is a platform for debt-fuelled consumer spending!!!!!!!!
Economies grow when people defer consumption and favour saving and investment. When someone borrows money in order to spend more today, they're going to have less tomorrow in order to pay back the loan. The future always suffers.
So what happens in the long run? Well obviously Zopa is a tiny tiny part of the consumer borrowing market so they're not *responsible* for the direction of travel society's taking but by lending, you're committing to up to five years of a future you should rationally expect to be poorer than the present, at least for these particular individuals.
Even if you're hugely optimistic about "the recovery"(LOLOLOL) and see no problem with the bubbles in the stock market, the gilt bonds market and the housing market (which an optimist will regard as 'investment' rather than consumer's goods subject to vast ongoing inflation), you will still rationally view an individual taking out a loan today as being worse off for the next few years. It's a bet that they won't want to spend as much next year, the year after, the year after that or the year after that. Hmmmm. People who want stuff NOW NOW NOW are going to take it easy in the future. Ok.
So that's the main problem, but the other big problem is one facing us as lenders: moral hazard.
We get our 5.2% no matter how many borrowers pay on time or at all. Why should we scrutinise our loan book therefore? Who cares what the default rate is, when we're guaranteed to get our money no matter what?
On top of that there's all sorts of guarantees and reserve funds and so on.
So how's that a problem? Surely(DING!) safety's better than risk? No, emphatically not.
"Protected" industries are a time bomb: they're fine until they're no longer fine, then they're horrible. If the company ITSELF ends up going bankrupt precisely because of having to absorb the debt of the borrowers, there's no bail-outs for you then! (Or if there are, if let's say we end up like the high street, subject to FSCS promises: how is impoverishing the general public better in the long run? You'll get your money but nobody will be able to trade with you.)
But but the company will control things: ok so a million lenders aggregate their risk into a single strategy. Is that really better? What if our infallible directors are hit by an unexpected surprise? What if, for example, some governmental intervention results in half the borrowers defaulting overnight? What if hyper-inflation hits and the rates are no longer any better than the payday lenders? What if there's a bank run!
No you're better off managing your own risk.
So am I saying don't touch Zopa? Not at all, I think it's good. Where else will you get what amounts to a sound money retail bank account paying the normal market rate or thereabouts? Compared to ISAs and the bonds offered by banks, this is much much better. The company sees itself as a pragmatic alternative to credit cards and that's laudable. If we can't stop people borrowing through persuasion and we don't want to stop them through force, providing a better means is a good practical improvement.
Just be mindful of how destructive consumer borrowing is when deciding what priority to give this type of thing in your P2P portfolio. ("Underweight" it in other words.)
And be mindful of what's actually going on when the guaranteed rates change (and even when they don't): the timing of your exit strategy could be very important in an area exposed to the vicissitudes of the business cycle.
/endrant
