It’s 10 years since Zopa matched our first borrower to lenders. Since then we’ve been on a mission to help everyday people earn more on their money by bringing great rates, and better loans to more sensible borrowers.
Over the 10 years we’ve taken a very cautious, prudent approach to growth, gradually lending to more types of people as we get comfortable with the risks based on the data we have collected.
We’ve recently used this historic loan performance data to help us take the next step in our journey, assessing performance across economic cycles, and have increased the number of people that would be approved for a loan.
We’re still targeting a very prime (i.e. low risk) customer base, of personal unsecured loans.
We’re doing this in two ways.
First, we are increasing the number of people approved in higher grade markets (non-A* star). Our expectations for each risk market remain the same, but we expect to change the mix, and as a result are expecting the blended lifetime default rate for A*-C1 loans to increase from 2.0% to 2.9%.
Second, we are introducing two new markets (D & E loans), with higher expected default rates. We have been testing D & E loans with our institutional partners, and depending on performance, will partially roll out to the retail (individual lenders) markets in time. Including these markets in the lending mix will mean our expected lifetime defaults would rise to 3.7% - which brings us more in line with typical UK high street bank loan portfolios.
We will continue to offer individual lenders protection through our proven diversification method and Safeguard Fund, which continues to perform robustly. We will obviously be increasing the contributions to the fund, reflecting the expected increased risk of the new loans.
Impact on disbursals and lending speeds
The increase in approval rates has had a significant impact on the amount of loans we are disbursing, and as a result, lending speeds have increased dramatically. This is a combined effect of two different factors: Increased approvals directly increasing disbursals but more importantly, this enables us to market more efficiently, thus allowing us to get more borrowers to come to Zopa and apply for a loan.
Impact on lender rates
Initially we expect this to have a modest impact on lender rates. We’re approving more non-A* loans, but we’re also attracting many more borrowers in general, so the proportion of non-A* will not shift as dramatically as the increase in disbursals. As mentioned above, these loans will continue to be protected by the Safeguard Fund.
As and when D & E markets are opened up to retail (individual lenders) markets we would anticipate the rates to increase, but again, we expect these to be a modest share of the overall portfolio.