ZOPA has reduced its exposure to higher-risk loans due to the UK’s worsening consumer credit outlook, which has led it to lower its projected returns on some investments.
The peer-to-peer lender also said that it is expecting slightly higher losses on its existing loans and an increase in early repayments from borrowers.
“Since 2010 the UK has seen continually improving consumer credit performance leading to historically low levels of bad debt,” said Zopa in a blog post on its website on Tuesday.
“In early 2016, we at Zopa started to see some early signs of a possible change in this trend. It now looks like the change is real: publicly available data suggests consumer default and insolvency levels are reaching levels which are more consistent with historic norms prior to 2010; and the Bank of England in their credit conditions survey stated ‘lenders reported that default rates on both credit cards and other unsecured lending to households were reported to have increased significantly in the second quarter [of 2017]’.”
Zopa said that it had recently reduced the amount of lending in its higher-risk, higher-return tranches that are included in its Plus product and is taking steps to attract more low-risk borrowers.
As a result of increasing the proportion of lower-risk loans, its Plus account will now offer a targeted return of 4.5 per cent for new investments, while the return on its Core account will be lowered to 3.7 per cent.
These accounts previously offered targeted annual returns of 6.1 per cent and 3.9 per cent respectively.
For existing loans, Zopa is expecting slightly higher losses and an increase in early repayments from borrowers, which will reduce investors’ returns.
The company said this would not affect investments protected by the Safeguard fund, which Zopa previously announced is being phased out entirely by 2022.
However, it warned that returns on existing investments in non-Safeguarded loans are likely to be lower than original expectations – 3.5 per cent compared to 3.9 per cent in Core and 5.6 per cent compared to 6.3 per cent in Plus.
Zopa said it will publish a blog post each month giving an overview of changes in the consumer credit market, giving its customers the opportunity to ask questions.
In its annual accounts, published yesterday, Zopa had highlighted concerns around the continued growth of consumer unsecured debt, amid rising inflation.
“The company continues to monitor credit performance and indebtedness trends closely and will act consistently with its prudent approach to credit risk management and responsible lending,” it said.