The ZOPA is a range of rates over which you can expect to lend out money over the next 7 days. The bottom of the ZOPA is where you will lend out your money as fast as possible by participating in all loan applications. The top of the ZOPA is where you will lend out your money at a slow rate while still participating in some loan applications over the coming week. The rate you choose in each market should give you a return you find acceptable after fees and possible bad debt regardless of what the rest of the market is doing. But, if you select a very high rate that is above the Zopa in all markets, you may not lend money and earn no interest at all.
To give you an accurate forecast of your lending over the next 7 days we need to work out two key figures:
The percentage of loans your lending offer will participate in a given market
- The total number of loans that will be disbursed in the next 7 days in that market
These are then simply combined with your maximum exposure per loan (usually £10) to produce your lending forecast:
- Lending Forecast=Loans Disbursed × Participation Rate × Max Exposure
To work out both key figures we will use 1 month of actual loan applications and disbursals. The reason for using 1 month rather than 7 days is to smooth out the monthly funding cycle and to produce a large data set to improve statistical significance. This data will be used to generate a participation curve like the one shown on the chart below. The horizontal axis of this chart shows the lending offer rate and the vertical axis the percentage of all loans (in A* Shorter in this case) the lending offer would have participated in the last month.
Example: A lending offer at 6.3% in A* Shorter would have participated in 68% of loans in June and the average number of loans disbursed per day was 23.5. So on the 30th June the lending forecast for a lending offer at 6.3% would have been:
- Lending forecast = 7 days x 23.5 loans per day x 68% participation x £10 = £1,120
It’s as simple as that! A few small changes need to be made to the lending offer page and to the matching queue to make this new method work better and I’ll talk about that in my next post.