Zopa lenders look silly - but how to make money from it?

arabianights · Jan 31, 2009

I am convinced that the lenders at Zopa are not attaching anything like enough risk premia to the loans they are writing. As an intellectual exercise I've been trying to think of a way to make money out of this identified discrepancy but can't - which I suppose is why this anomaly is there. Any ideas? Perhaps Zopa should introduce a community CDS market!

adamscj · Jan 31, 2009

arabianights said:
I am convinced that the lenders at Zopa are not attaching anything like enough risk premia to the loans they are writing. As an intellectual exercise I've been trying to think of a way to make money out of this identified discrepancy but can't - which I suppose is why this anomaly is there. Any ideas? Perhaps Zopa should introduce a community CDS market!

The quoted rate for an A* borrower is just under 10% and if you lend more than £500 then your risk is split to at least 50 people. So if we imagine that each person you've leant to has 2% of your capital, then if any more than 4 of those 50 default on the loan then you'll lose money.

I know we're in unique times, but from what I would have thought default rates on personal loans are still well below 8% aren't they?

arabianights · Jan 31, 2009

Sure but we're not at a risk free rate of zero yet.

MrGecko · Jan 31, 2009

arabianights said:
I am convinced that the lenders at Zopa are not attaching anything like enough risk premia to the loans they are writing. As an intellectual exercise I've been trying to think of a way to make money out of this identified discrepancy but can't - which I suppose is why this anomaly is there. Any ideas? Perhaps Zopa should introduce a community CDS market!

Borrow some.

arabianights · Jan 31, 2009

That would only make sense if I needed a loan... Or are you suggesting that eventually enough will borrow from it that the market will adjust? Could be a scary thought that!

MrGecko · Jan 31, 2009

either Borrow the money and lend it out at a fair rate

or

borrow the money, use it to trade with, return - its a cheaper way of extending your capital than borrowing from someone who knows how much of a risk you are.

N Rothschild · Jan 31, 2009

hmm wonder if they will lend me some cash on my disaster of a credit rating haha

arabianights · Jan 31, 2009

Have a go I think they'll give anyone money

Zopa lenders look silly - but how to make money from it?

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