‘Credit scoring’ category

Slow, slow, quick, quick, Zopa

Posted by Dave at 12:46 pm

Avid Zopa lenders might have noticed a slow down in their money being lent out over the last few weeks - so I thought I’d take a quick opportunity to explain what’s going on.

The reason for the slowdown is that the number of credit worthy borrowers applying to Zopa has dropped recently - as we’d expect it to in December. The loan business is highly seasonal with fluctuations in quality through the year, and December is the hardest month of the year to find good quality borrowers.

So, although you might be seeing things move a little slower than normal, it’s because we’re doing our best to look after your interests&and don’t forget you earn 4.25% on money that isn’t lent out all the time that money is at Zopa.

Now - the good news is that January is not only a new year, but a major turnaround in lending. January has something like double the borrower volumes of any other month - as everyone works out just how much they spent over Christmas, and wants to sort it out. And to make it even better, the quality of borrowers shoots up as well.

So - in summary, hang on in there, enjoy your Christmas and New Year, and get ready to lend in January.

Posted in Rates, Lenders, Borrowers, Credit scoring | No Comments »

Bad debt rates

Posted by Dave at 9:20 am

This is the third (1st and 2nd) in an occasional series of posts on credit and credit scoring.

I thought it might be interesting to show some data on how delinquent loans emerge over the life of an unsecured loan. Delinquent loans (also known as being in arrears) are those that have missed at least one repayment - all the way through to being written off.

The graph below shows, for a personal loan portfolio with an average life of 3 years, how delinquency develops over the life of the loans. The X-axis shows months since the start of the loans, the Y-axis shows the percentage of loans that are in arrears, as a % of loans in arrears after 60 months (At 60 months, all remaining loans are in arrears, so the value of the curve = 100%)

The basic shape of the curve will be the same for all terms and credit qualities - just the absolute level of arrears represented by 100% will differ.

Loans enter arrears at a pretty steady rate month by month, as a function of the credit quality of the loan book. Hence the first few months are a straight line. As the loan book matures, you find people coming out of arrears, and getting loans back on track, and the loan starts to flatten.

At some point, you get approximately the same number of borrowers entering arrears, as you do leaving, and the curve becomes relatively flat.

Eventually, delinquent loans get written off. When this happens is determined by the credit policies of the loan manager, but is typically 3 - 6 months after the missed repayment. This means that there is a considerable delay between the loan delinquency curve and the loan write off curve. It also means that most write offs occur towards the end of the loan term. For example, on a 3 year loan book, the write off chart will principally be over years 2 and 3.

By this late stage, many good borrowers have repaid their loans early (The average amount of time a good repayer holds a 3 year loan for is 18-24 months) and you’re left with an increasingly ‘bad’ book of loans - those that are in and out of arrears (pay one month, miss the next, pay up again etc.), and those who are already deep in arrears.

It is possible to project likely write offs from delinquent loans based on ‘roll rates’. These show what percentage of loans in a certain stage of arrears more to the next stage. For example, a typical set of roll rates for unsecured loans would be:

• 15 days to 1 month: 30% (i.e. 30% of loans that go 15 days late will move to being 1 month late)
• 1 month to 2 months: 50%
• 2 months to 3 months: 60%
• 3 months to 4 months: 75%
• 4 months to write off: 90%

You can multiply these through to calculate the final write off - for example, if £100 of loans are 1 month late, £20.25 is estimated to end up being written off (£100 x 50% x 60% x 75% x 90%) - so Zopa’s current level of arrears (c. 0.05%) is actually about 5 x the amount we’ll finally write off from the delinquent loans. Which we’re pretty happy with!

Happy to answer questions - either in the comments, or the discussion board.

Posted in Lenders, Credit scoring | 11 Comments »

More on credit

Posted by Dave at 8:04 pm

If you’ve been paying attention to the Zopa blog, you may remember a previous post where I promised to start a serious of posts on how Zopa manages credit and credit scoring in general.

Well, this is part 2!

I thought I’d spend a little time describing how our credit process works - hopefully that’ll be useful for anyone applying for a loan at Zopa, and might be interesting for everyone else as well.

When you join Zopa, you get your credit score that we obtain from Equifax, and this is what is used to place you in a market where you can borrow from Zopa lenders. (Read the previous post for more about credit scores if you’re interested.) When you go to borrow, we show you how much your loan is going to cost you and ask you a series of additional questions to get a better view of you and your finances. We also set up a direct debit at this stage so that your lenders can get their money back!

After a borrower has been ‘matched’ with lenders, that money is taken off the market (although lenders continue to earn interest on it) and the borrower is submitted to our underwriting team for a decision about whether to approve tha loan or not. We need to do this because just a credit score isn’t enough to determine whether someone is creditworthy or not - it’s just an indication.

The underwriters will look at a borrowers address history, employment history and their existing levels of secured and unsecured debt. If necessary they will phone the borrower or the borrowers employer to confirm details. When they have all that information (and have checked up on the UK’s anti fraud databases (CIFAS and National Hunter from MCL Software) and have decided to approve a borrower, we send a PIN to the borrowers address which we require to be emailed back to us - and then we send out the money!!

It’s a lot of work behind the scenes - but we need to make sure that in Zopa’s early days we don’t expose our lenders to more credit risk than we (or they!) expect. Over time we’ll make more and more of this an automated process, but it’s been very successful to date.

I hope that’s useful - a little drier than many of the posts on the blog, but a little peak behind the web site. Any questions - let me have them in the comments.

Posted in Borrowers, Credit scoring | 19 Comments »

An intro to Zopa and credit scoring

Posted by Dave at 6:23 pm

We’ve had lots of questions about credit scoring, and how we use it at Zopa. This is the first in a series of posts that will try to explain exactly what information we have on our members and what we do with it!

As you probably know, your creditworthiness at Zopa is defined by a credit score we obtain from Equifax. This is a number (usually between 0 and 550) that we use to categorise all our members into A’s or B’s.

An important thing to note is there is no such thing as ‘your’ credit score. Equifax, Experian and (in the UK) Call Credit all store information on consumers, and use this to generate many different scores for banks, retailers and other institutions. The score a company uses is often created for them based on the ‘type’ (defined in terms of where they live, their employment status, income etc.) of customers they expect to get.

The whole thing is made yet more complicated by the fact that different bureau use information from different sources - so your perfect credit record with NatWest may be completely ignored by, for example, Equifax, because NatWest don’t provide their information to them! (Banks aren’t very good at sharing - but since you’ve come to Zopa, you probably know that!)

Zopa uses one particular credit score from Equifax to do our categorisation - if you use the services of the credit bureau to see your credit score, you may well see a different (sometimes very different!) number.

Phew.

When we ask Equifax for your credit score, we use a type of search (known as a quotation search) that is different from that used when people apply for credit. Applications for credit are used by institutions (including Zopa) as one indicator of how creditworthy a person is - many applications for credit in a short period is seen as a bad thing.

Because the Zopa search is not a credit application, it won’t be seen in the same way, and so joining should not affect your ability to get credit in the future. Unless you borrow. If you borrow from Zopa, we change the search type we carried out to show that you have applied for credit - so that other institutions can see this in the future.

The Zopa search is recorded by Equifax though, so if you later get hold of your credit report you will see us there!

Please ask questions in the comments, and I’ll respond - either in a new post or in the comments themselves.

Posted in Lenders, Borrowers, Credit scoring | 27 Comments »