Back to Zopa risk management
Risk analytics are at the heart of what we do. You trust us with your money, and we don’t take that responsibility lightly. Over the last decade and more, our risk analyses have proved robust, consistently performing according to plan.
How have Zopa’s default rates performed against expectations over the last 11 years?
In order to meet expected returns for our lenders, we’re dependent on how accurately we can predict defaults. A borrower is considered in default after missing four months’ worth of repayments. We set an expected default rate at the start of each loan and update it as the loan performs (“revised projected defaults”).
Expected defaults compared to actual defaults 2005-2015
A large proportion of loans originated after 2013 are still outstanding therefore comparison of expected and actual lifetime default rates is less meaningful at this stage.
How have Zopa’s returns for lenders performed against expectations over the last 11 years?
We measure our returns performance partly, but critically, by comparing expected returns to actual returns Expected defaults
The amount of defaults we expect over lifetime of loans when we originated them.
Total defaulted loan amounts, as a percentage of amount lent in the calendar year.. This contributes to our track record of delivering consistent returns, and also holds us to account on how returns actually perform, compared to what we expected.
Over 11 years, we have collected a wealth of information that allows us to make informed default rate predictions. This information has helped us get better at meeting our expected default rate.
Expected returns compared to actual returns 2006-2015
What happens if default rates differ from our expectations?
To answer this, it’s clearer to separate Safeguarded products (Zopa Access and Zopa Classic) from Zopa Plus, which is not covered by the fund.
Access and Classic
We fund Safeguard based on our expected lifetime default rates for loans which are covered by Safeguard. In addition to our expectations we add an additional 10% buffer.
If actual defaults are lower than expected, this buffer would increase.
If actual defaults are higher than expected, then Safeguard would struggle to repay the expected interest.
These examples are some of the variables that determine how well Safeguard will perform, and how many defaults it can cover. Read more on our Safeguard page.
Access and Classic Safeguard responses
Last updated: September 2016
- The current expected lifetime default rate is 2.3%
- If default rates are less than expected, there is more buffer in Safeguard
- Safeguard would not be able pay the full amount of expected interest to lenders if default rates increase to 3%
- Losses to capital are not expected to occur unless the default rate is more than 10.5%
This graph demonstrates what would happen to interest rates and how Safeguard would perform under different default rates. This data reflects the current state of Safeguard across all loans covered by the fund, lender interest rates will differ depending on their individual loan books
We use our expected lifetime default rates for Plus loans to inform the headline rate of returns for lenders.
As we do with Access and Classic, we monitor this lifetime default rate very closely. In Plus, if it’s lower than expected we pass on all benefit directly to our Plus lenders. Likewise, if default rates are higher than expected then lenders returns will be lower than expected.
Zopa Plus isn’t covered by Safeguard. This is in part why we set a minimum investment of £1,000 in Plus: so we can diversify your cash across a number of borrowers.
Plus response to increased default rates
Last updated: September 2016
- The current expected lifetime default rate for loans in Plus is 6.7%
- If default rates are lower than expected, returns will be higher than expected
- Losses to capital are not expected to occur unless the default rate is more than 16.5%
This graph demonstrates what would happen to interest rates for Plus loans - which are not covered by Safeguard - if default rates increased.
Before you go any further, remember past performance is not a reliable indicator of future results. And forecasts are not a reliable indicator of future performance.
Read more about risk information.
Zopa's public loan book showing historical performance is available for download.