Explaining the secondary market
Back in 2010, we introduced the ability for investors to access all or some of their money before the loan terms they’re invested in are completed. This is done by selling loans to other investors. For Classic and Plus investments, there’s a 1% fee for this service.
In order to sell your loans, there must be other investors to buy them. This is where the secondary market comes in: it’s here that we match existing loans being sold to other investors.
Matching your money
We match your money to loans on two different markets:
- The primary market is where we match your money to new loans recently approved. This year, to date over 48,000 people have had their investments matched to loans on the primary market.
- The secondary market consists of investors selling their loans. These loans are partially repaid, and the buyer will receive all remaining repayments on them. This year, to date over 36,000 people have had their investments matched to loans on the secondary market.
In both markets, the matching process is automated. There’s no manual effort on your part; no picking and choosing of loans, or deciding who to sell to. So if you’re buying loans, your portfolio’s projected return continues to be at or near the target return, and if you’re selling loans, you receive the correct amount back in proceeds.
Why is a secondary market a good thing for investors?
The secondary market gives investors a simple way to access a lump sum of capital before your loans are fully repaid (provided there are other investors to buy your loans). For investors buying loans, it is another pool of loans to be matched to, and helps to keep your money earning.
The loans you buy will always follow your investment choices. For example: if you’re investing in Zopa Access or Zopa Classic, you won’t buy D or E loans on the secondary market.
Can loans always be sold?
No, sometimes it’s not possible to sell all your loans. This could be because:
- There is a pending payment on the loan – in these instances, we wait until the seller has been repaid before the loan can be sold.
- The loan is currently in arrears – it’s not fair for the buyer to take on a loan which is not currently paying back.
- The loan has defaulted.
Loans with payments pending can be sold as soon as the payment clears, and loans in arrears with Safeguard coverage can be sold after the fund has purchased the bad debt. As of June 2017, Plus and Core loans which have previously been in arrears can be sold: however be aware that capital you receive for selling these types of loans may be less than you’d receive for loans that haven’t ever been in arrears. Defaulted loans in all products are ineligible for sale.
Are there fees to use the secondary market?
In Classic and Plus, there’s a 1% administration fee for selling loans. This fee is waived in Access (for which investors earn a lower return).
If you’re selling a loan that’s worth less than a new investor could expect on a similar loan in today’s primary market, you may have to compensate the investor buying the loan. For example:
- You’re selling a loan with a 4% interest rate, and the primary market rate of a similar loan has increased to 5%. In buying this loan, the investor would be worse off for not buying a new loan from the primary market.
- To make it fair, you (the selling investor) compensate the buyer. We manage this through an automated process which calculates the compensation amount by comparing the value of your loan to a similar one available on the primary market. We then pass the money directly to the buying investor.
How can I see if my loans came from the primary or secondary market?
In your loan book, which is available to download any time, there are two columns which will show you which market you purchased the loan in: the date each loan started, and the date you acquired each loan. By comparing these, you’ll see which loans came to you from the primary market, and which were partially repaid before you acquired them.
What’s next for the secondary market?
We’re always looking to improve our services. Watch this space for exciting news around how we’re making the secondary market even better.
Andrew Lawson is Chief Product Officer at Zopa
This post has been updated from the original.
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