The peer-to-peer platform revealed that one of the consequences of increasing the proportion of lower-risk loans was that it expected to see a lower targeted return for new investments in its Plus product. 

Zopa’s more cautious approach started in 2016 when it began to see some changes to consumer credit performance.

This was confirmed when the Bank of England revealed that lenders had reported that default rates on credit cards and unsecured lending to households had increased significantly during Q2 2017.

“While we are not immune to this industry-wide trend, the impact on lending at Zopa is limited,” said Andrew Lawson, chief product officer at Zopa (pictured above), in a blog post to users.

“This is because we identify and focus on low-risk borrowers. 

“We have been cautious in our underwriting in anticipation of increases in default rates and since early 2016 – in response to very early indications – {we] have been more and more cautious in our lending criteria.”

Zopa has reduced the amount of lending in its higher return D-E markets, which are included in its Plus product.

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The Plus product was designed for investors who were willing to accept more risk for higher returns, with rates of between 6-7%. 

Zopa expects that the lower-risk approach will mean the targeted returns for new investments in the Plus product will be 4.5%.

“It is important to note that the target average return levels for new investments in each risk market (A–E) have not changed materially,” added Andrew.

“The change in overall return is a result of changes in mix. 

“For example, the proportion of D and E loans in the Plus product would go from 30% until now, to 10-15% in the future.”

For existing loans, Zopa expected to see slightly higher losses, but did not expect any impact on Safeguarded loans as it expected Safeguard coverage to remain above 100%.

“In addition to changes in loss expectations, we are also seeing an increase in early repayments from borrowers,” said Andrew.

“While this means that investors get their money earlier, it also reduces interest income and thus returns.

“If these trends in early repayment rates and credit losses continue, we would expect that for existing investments in non-safeguarded loans originated up to August 2017, realised returns will be lower than original expectations: 3.5% compared to 3.9% in Core and 5.6% compared to 6.3% in Plus.”

Andrew added that Zopa would publish expected losses for existing loans on its website and would give an overview of what was happening in the consumer credit market.