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By Sarah Modlock
Aah, where are they now, those banks who were our best friends just a few months ago? They couldn't lend to us fast enough when times were good. Now you'd be lucky to get a loan without having to offer your first born child as security. But there is one place where people cut out the banks and loan companies and lending to and borrowing from each other. Zopa.com is the first people-to-people marketplace for lending and borrowing. Launched in March 2005 by the brains behind Egg and the backing behind eBay and Skype, it specialises in competitive borrowing and lending rates and attempts to match smaller lenders with borrowers. As of last month, Zopa has arranged a cool £30million in loans between its 222,000 members. How it works Lenders can make loans from as little as £10 but once they lend more than £500, the money is spread between at least 50 borrowers, to minimise risk. The lender specifies how much they are willing to lend and over what period (between one and five years). They are then asked to choose the price at which they are willing to lend. If a lender's loan rate is too high, there will be no takers and the money will simply sit there earning the 1.25% (always 0.75% below base rate) paid by Zopa. Borrowers can apply for loans of between £1,000 and £15,000. They are carefully assessed for credit worthiness and the affordability of the loan they are seeking. They are then shown the best interest rate available to them, Zopa having automatically trawled all the offers from lenders to work out the best aggregate rate. If the borrower likes the rate on offer they simply click to proceed with the loan. A different version of Zopa's service, called Listings, allows borrowers to make a more personal pitch of the loan. The write their own listing, and can add photographs to bring their story to life. Lenders then bid on the listing, saying how much they are prepared to lend and at what rate until the listing closes. Lenders compete against each other - coming in with more competitive bids until the auction ends, even if the loan amount is already fully covered. If bids for the entire loan amount are received, the loan is made at the aggregate interest rate of the best bids. If not, the borrower can re-list the item. Sub-prime borrowers are unlikely to become Zopa customers though. All Zopa borrowers - who undergo a stringent vetting process - are rated A*, A, B or C according to their creditworthiness and this will be factored into the interest rate they are offered. If a borrower likes the rate that is available to them, he or she simply clicks the button to accept the loan. If they think the rate is too high they can revisit a day or two later to see if more competitive offers have been made. Once a borrower accepts a loan offer, Zopa arranges for the interest to be paid by direct debit into the lender's holding account, from where it can be withdrawn or relent. Zopa carries out full credit checks on all borrowers in exactly the same way as a bank would. It runs the normal checks via the electoral roll and various credit reference agencies. Its rigorous procedures mean that only the top 50% of applicants are accepted as borrowers. Industry commentators say that it's precisely because Zopa is so fussy that it is able to keep its very low bad debt record of 0.18% - equivalent to an AAA-rated bond. Would-be Zopa lenders do need to remember that there is no guarantee with Zopa loans that the default rate will not increase, potentially bringing down their overall return. But its 'state-of-the-art' credit and affordability checks have so far kept the default rate consistently at its 'virtually zero' level. Charges are simple and transparent: lenders pay an annual fee of 1% on the money they lend, and borrowers pay a fixed fee of £94.25 which is added to their loan and reflected in the APR figures quoted. There are no hidden charges or any form of early repayment fee. Lenders and borrowers enter into a legally binding contract with each other and Zopa manages the collection of monthly repayments. If a repayment is late, Zopa chases up the borrower in the same way a bank would and uses the same recovery processes if it comes to that. Zopa is not a bank, so loans are not protected in the same way as bank and building society deposits. Instead, it holds consumer credit licences from the Office of Fair Trading. What's in it for lenders? At the time of writing, Zopa lenders are achieving returns of 8-12% gross (after Zopa's 1% annual charge and bad debt are deducted, but excluding tax) depending on the group of borrowers chosen. The average rate of return lenders have been getting on loans made over the last nine months is actually 10%. And because these loans are at a fixed rate, so are the returns, typically over three years which is the most common term. In a climate where savers are taking a very firm second place to borrowers, Zopa provides a chance to get a very attractive return at low risk. Then there is the transparency - lenders offering loans to borrowers on Listings can see exactly who they are lending to and what those borrowers are doing with the money. Although many people take out loans for cars, home improvements or debt consolidtaton, reasons for borrowing have ranged from paying for cancer treatment, publishing a sci-fi trilogy to IVF treatment, solar heating for a bungalow, Newcastle United season tickets, funeral expenses and lots of weddings. Zopa covers its lenders for any fraud or identity-theft risk but the lender takes the credit risk. Any missed payments are chased on the lender's behalf by a debt collection agency - the same process used by the high street banks. "Everyone is authenticated and validated," says spokesman Martin Campbell. "We check that people are who they say they are.We work with major credit reference agencies and accept borrowers only after we are sure they can sensibly afford the loan amount they are after. "We ask more questions of borrowers than a bank, because we believe in responsible lending and because we need to protect our lenders. After all, it's their money that is being lent out." What's in it for borrowers? The benefits for borrowers are that interest rates available are typically 20% lower than the rate each borrower can get from a traditional lender and that there are no early repayment penalties. This has made Zopa particularly attractive to the self-employed and others who, because they have fluctuating earnings, may find it difficult to borrow from the banks and may also wish to repay loans early. There is also the personal element and knowing that someone is getting a good deal by lending to you - not taking you for a fool. One of the increasingly popular reasons for borrowing is to start small businesses, perhaps driven by increasing redundancies. Zopa is saying yes where some banks say no, so it has started to attract more would-be entrepreneurs. Of course with no big bank involved, borrowers who meet the strict credit criteria for Zopa will be side-stepping the current hikes in rates as banks try to recoup money lost in the credit crunch. This is the reason Zopa is booming right now - arranging twice the volume of loans month by month on this time last year - simply because the creditworthy part of the borrower market Zopa serves is being rejected or overcharged by the banks. "There is something both ironic and appropriate about the fact Zopa is booming as the bailed-out banks continue to struggle and disappoint their customers," says Zopa managing director and co-founder Giles Andrews. "As those same banks continue to refuse to lend willingly to each other, more and more people are bypassing the banks and lending to each other instead - to their great mutual advantage. As word spreads, increasing numbers of people are taking advantage of the uniquely attractive alternative Zopa offers and the very low default rate we have managed to maintain through always lending responsibly - to credit worthy people who can afford to repay the loans they are seeking." Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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