Zopa says rate hike will not impact loan performance
ZOPA has reassured investors that the Bank of England’s interest rate hike will not impact the performance of the peer-to-peer platform’s loans.
On Thursday, the central bank raised the base rate from 0.25 per cent to 0.5 per cent – the first increase in a decade.
“Things may get a little more expensive for some borrowers, but we don’t expect this to have a material impact on the performance of Zopa loans (and so we don’t expect losses to change),” said chief product officer Andrew Lawson (pictured) in a blog post on Zopa’s website on Friday.
“This is because we focus on low risk borrowers, and because we have strict criteria on whether our borrowers can afford their loans. Before we approve anyone, we assess their affordability by looking at their income and outgoings and try to make sure they can make the monthly payments.”
In August, Zopa reduced its exposure to higher-risk loans due to the UK’s worsening consumer credit outlook.
Lawson went on to explain that the returns from Zopa investments are not directly linked to the base rate.
“The rate of return you receive from your Zopa investments is a blend of the interest rates of the different loans you invest in, minus bad debt and fees,” he said. “And our loans’ interest rates are set within the context of the wider market – we have to price them competitively to make sure that we attract the most creditworthy borrowers to Zopa.”
Read more: Investor money covered by Zopa’s Safeguard fund falls to quarter of loanbook
However, Lawson added that other lenders may raise their prices in anticipation of increased defaults.
“We monitor pricing in the market in real time every day and are prepared for changes in either direction,” he said. “If we do see a shift in the market, we’re ready to act and we’ll let you know.”
Read more: Zopa revamps credit risk assessment model
Speculation has been rife over how the P2P sector would fare in a higher interest rate environment, but Lawson made the point that this “isn’t something new for Zopa”.
When the consumer lending platform made its first loan in 2005, interest rates were at 4.75 per cent. And in Zopa’s first five years, interest rates varied from 5.75 per cent to 0.5 per cent.