Zopa - Lending without banks
Zopa is a live market with rates
decided by the members. The idea is to provide a forum where people
can meet to lend each other money. It has ebayesque qualities
in that people decide what rates to lend money out at, over what
period. You can even get to know the people you are lending to
or borrowing from. It takes the impersonal nature of lending money
from a faceless bank and turns it into a personal transaction
between people.
This is a good example of how the Internet was intended. Adults
coming together without the paternalistic state or an often confusing
commercial bank and deciding what they want to do with an aspect
of their lives. Sure the guys who came up with the idea are making
money but you know how they're doing it and there's no hidden
fees. Don't get me wrong, this isn't just a forum where people
chat with the main theme being the lending and borrowing of money.
They have a serious credit check system and a tiered structure
of markets with different but easy to understand levels of risk.
So, how does it work?
You register with Zopa as either a borrower or lender. Anyone can lend money but only someone who has been credit checked can borrow money. At Zopa you lend into a particular market. Markets are defined by the credit rating of borrowers (Market A, Market B etc.), and the term of the loan (12 months, 24 months etc.) When you place money in a Zopa market, your money is lent in separate contracts of £10 each to at least 50 borrowers. Your offers, together with those of all the other lenders in a market are ranked, firstly by the rate lenders have set (lowest to highest) and secondly by the time the offer was placed in the market (earliest to latest).To be credit worthy you have to have demonstrated a responsible use of credit over the last 6 years, been on the electoral register for 6 years or more and not increased your borrowing recently. C-rated borrowers will meet the criteria. B-rated borrowers will meet the criteria well. A-rated borrowers will meet the criteria really well and A*-rated borrowers will meet the criteria really, really well.
Your credit score is provided by Equifax, one of the UK's main credit referencing agencies. Such things as how long you've lived at your current address and your recent credit history affect your credit score.
The Zopa markets are a way of grouping borrowers according to their credit score and how long they want to borrow for. So when deciding which market to offer in, you need to think about how long you want to lend for and what sort of borrowers you want to lend to.
A*-rated borrowers are more creditworthy than A-rated borrowers; A-rated borrowers are more creditworthy than B-rated borrowers; and B-rated borrowers are more creditworthy than C-rated borrowers.
Lending to the most creditworthy borrowers has the lowest risk level, but you can get potentially higher returns by lending to B- and C-rated borrowers. You can lend your money all in one offer or split it up into a number of different offers in different markets at different rates. You can make offers in amounts of £10 to each borrower, although the highest number of contracts any one borrower can have with a single lender as a result of his or her successful bids is 20.
They say that you're actually very unlikely to lose any of your loan principle, let alone all of it but to safeguard your money, all Zopa borrowers are credit-checked and risk-assessed, and your maximum exposure to a single borrower can be limited to £10. So if you lend more than £500, your money could be spread across at least 50 borrowers.
How do Zopa get paid?
Lenders pay an annual 0.5% fee on the amount they lend to borrowers.
They are not charged for money which has not been lent out. The
fee is accrued on a daily basis equivalent to 0.5% p.a. and deducted
monthly from their holding account balance.
So, for example, if a lender lends £1000 at 7% over 12 months,
they get a total return of £1037.13, assuming all the money is
lent out and paid back. The fee in month 1 would be £0.42; but
in month 2 it would only be £0.38 because they'd have already
received the first chunk of their money back, and so the capital
outstanding would have decreased. The lender would pay a fee of
£2.69 in total.
If a borrower defaults on part of their loan, the lender is not
charged a fee for that part and similarly, if a borrower repays
early, the lender pays no fee on the portion of the loan that
has been repaid.
When it comes to loan lengths, in general, the longer the loan
period, the higher the rate of return. It's also worth bearing
in mind that borrowers repay monthly, and the repayments are yours
to do what you want with - so lending over 3 years doesn't mean
all your money will be tied up for that amount of time.
Zopa also earns money through selling payment protection insurance
to borrowers who want it, and through helping people who can't
borrow at Zopa by introducing them to other loan providers if
they so wish.
Zopa charges borrowers a fee of 0.5% of their loan amount and
lenders a 0.5% annual service fee and that's it.
Another added bonus is that Zopa's holding account also acts
as a saving account with an interest rate of 5% (July 2007). This
means that any money transfered into Zopa and waiting to be lent out or funds returned by lenders will instantly
earn money. Even more transparent is the fact that Zopa, in the typical Zopa fashion,
passed on the latest interest rate rise and increased the holding account interest
rate by 0.25% within 9 mins after the announcement by the Bank of England.
All in all we think this is a fascinating financial model for
lending money and we wish Zopa well. Why not give it a try and
see what comes back.
Sign up now
For an more in-depth and analytical
approach to lending at Zopa please have a look at Elljay's
(aka Laurence Skinner) website. The information gets updated
continously and shows invaluable information such as total amount
on offer, loans quoted, new lending offers, largest loan available,
total requested by loan length, total requested by market, lowest
rates offered by lenders and average rates for last 5 loans applied
for.
