You may think the idea sounds crazy, but a growing number of people are lending their own money over the internet — and they are receiving market-beating rates in the process. In fact, the idea has proved so popular that the British internet company that came up with the concept has decided to expand into the United States.
Founded by the creators of Egg, the online bank, Zopa.com puts people who want to lend money in touch with people who want to borrow. By cutting out the “middleman” — otherwise known as the banks’ profit margin — the website allows people with spare cash to obtain a higher rate of return than on a deposit account, while borrowers can receive a cheaper loan rate than normal.
The website has been described as the eBay of personal finance and has attracted more than 78,000 members, who have loaned or borrowed more than £2 million since its launch in March last year.
James Alexander, the co-founder and chief operating officer of Zopa, which stands for “zone of possible agreement”, says that the service is for people who would rather lend and borrow directly than deal with faceless corporations. He says: “Lending through Zopa gives people a better, fairer and more transparent rate of return than they could expect from a bank — and the chance to help others to get a better deal. It is a more connected and personal way of dealing with money.”
The average rate of return for lenders on Zopa is 7 per cent, before tax and defaults, and the average loan rate is similar. Mr Alexander says that it would be difficult for a Zopa member to obtain a better deal on the open market.
Samantha Owens, head of research at Moneyfacts, the financial information service, says that any service that adds choice to the market is a good idea, but she warns borrowers that they can find better deals on the open market.
“On Zopa this morning you could get a £5,000 loan over three years at a rate of 6.4 per cent, while Direct Line offers a rate of 5.6 per cent for the same amount over three years,” she says. “Also, Zopa only accepts borrowers who earn more than £25,000 and the rates on offer can change minute by minute. That is why we don’t include them in our price comparison tables.”
Nick White, head of personal finance at uSwitch, the price comparison website, says that the best rates to be found on Zopa are usually for short-term loans. Ms Owens, meanwhile, says that the interest rates for lenders look attractive but they are not comparable to instant-access accounts. “With Zopa, your money is tied up over the course of the loan, so if you need quick access to your cash, don’t lend on Zopa.”
Since the launch, the default rate on loans has been only 0.05 per cent, although Zopa warns its lenders to expect a default rate of between 1.3 per cent and 3 per cent.
Mr Alexander says that Zopa has a rigorous credit-checking procedure and accepts only the top 50 per cent of borrowers as members.
“Everyone is authenticated and validated,” he says. “We check that people are who they say they are. We work with all three credit reference agencies and accept borrowers only after a direct debit has been established. We ask more questions on our application form than a typical bank — we even ask people about their eBay feedback ratings. It is a different measure of trust, but it can be useful.”
The website works by ranking accepted borrowers into two categories: type A and type B. Lenders can offer their savings to either type of borrower at any rate of interest for a set period of between six months and five years. Every loan offer goes into one of 12 marketplaces that reflect the six different loan lengths for type A and type B borrowers. Members can borrow up to £15,000 and are matched automatically with the deals in their marketplace that meet their criteria. If a lender’s loan rate is too high, there will be no takers and the money will simply sit there earning the 3.5 per cent paid by Zopa.
Lenders can offer up to £25,000, but from Monday this cap is being abolished. Deposits of more than £500 are always distributed between at least 50 borrowers to minimise the risk of bad debt. Deposits of less than £500 are distributed in £10 chunks. At present Zopa is offering a 2 per cent bonus to lenders.
Lenders and borrowers enter a legally binding contract with each other and Zopa manages the collection of monthly repayments. If a repayment is late, Zopa levels a fine. It also uses the same recovery processes that banks use. Zopa says that lenders who fall victim to fraud will have losses refunded.
The website makes its money by charging borrowers a 0.5 per cent fee and taking a 0.5 per cent annual charge from lenders. It also sells payment protection insurance (PPI) and introduces unsuccessful applicants to other loan companies. However, Ms Owens says that anyone borrowing on Zopa should shop around if they want PPI.
Mr White adds: “The challenge for Zopa is communicating the concept, because people can be put off by its complexity.”
Zopa is authorised by the Financial Services Authority to sell payment protection insurance to loan customers. The actual lending exchange is not regulated which means that Zopa customers' lending and borrowing activities are not protected by the ombudsman or complaints scheme should something go wrong.
CASE STUDY : Loan Ranger
Stephan Ashby, 55, a landlord from Morecombe specialising in student accommodation, has been a member of Zopa since its launch last year.
“Although I have lots of dealings with banks I am not a huge fan of them,” he says. “The personalised nature of lending on Zopa appeals to me. You can see to whom you are lending and what they are planning to use the money for. I have nearly 400 borrowers and some of them have even sent thank you messages.”
Mr Ashby says his borrowers are getting loans at a competitive rate and he is making a bit more than he would from a building society, so “everyone is happy”.
So far, he has lent more than £13,000 and is receiving an average return of 7.5 per cent. He has money in all 12 marketplaces, lending to type A and type B borrowers for periods of six to sixty months. “The best rate I have ever had was 14 per cent, but rates have slowly dropped and are now levelling out. The best rate I have at the moment is 9.5 per cent on a £10 loan.”
Mr Ashby has yet to experience the pain of a borrower defaulting. “I have one or two who are paying more slowly than they should, but they are still paying,” he says. “I am not worried because my money is spread across so many borrowers.”
He plans to increase his lending to more than £25,000 when he receives a credit licence.
“If you need instant access to your cash, Zopa is not for you,” he adds. “But I would recommend it to anyone with a bit of spare cash.”
