Simple Pound

I have recently come across the Zopa website, which claims to connect lenders and borrowers without involving banks - thus guaranteeing both parties better rates. The whole site is built around a community of people either willing to lend or people seeking to borrow money - from each other directly, rather than going to their local bank and thus making these institutions even richer than they already are.

And it seems to work as they are quoting quite competitive rates of 5.95% APR for a £5000 loan over 36 months, while promising lenders an average of 6.75% pa for their money (after bad debt and fee, before tax). Since I am not planning to take out a loan very soon, I was more interested in the lender aspect of this. It is essentially a bond based on an individual (and his credit rating) rather than a government or corporation - only with a much better return.

And here’s how it works: If you decide you have got some money left over that you wish to temporarily make available to someone else, you create an account with Zopa and transfer your money in, specifying which credit rating you will accept and for how long you want to lend the money. Their credit scores range from A* (very reliable) to C (still reliable, but less credit history - e.g. a student), which is based on an extensive identity-, credit- and risk-check. According to them, a person with a credit rating of “C” is still more creditworthy than the majority of the population. Well, that sounds good, but is obviously very difficult to prove…

The interest you get for your money depends upon the duration you’re intending to lend money and the people you’re happy to lend to. Since the website essentially functions like a market, the actual interest rate you are receiving will be based on supply and demand. So in order to get a decent return, you should put down your money for as long as possible (5 years) and ideally to C-rated people, because for these categories demand will potentially be highest. Obviously decisions like that depend upon you’re own risk attitude!

There is no lower limit for how much money you can put in the Zopa account - people start at sums of £10 or use Zopa as a regular savings account and make small monthly contributions. In most cases you won’t be lending to a single person, but your money will be spread across various people seeking a loan. This is an in-build protection mechanism based upon the wisdom that diversification limits risk. And if the conditions of your lending aren’t appealing to anyone in the market-place (for instance, your lending period is too short), you will still earn 4.5% interest on the money in the Zopa account - which is more than I am making with my savings at the moment!

As I said at the beginning, I’m beginning to really like this idea. Especially since you will know where your money is going and in most cases people also share what they are using the money for. In short this means that whenever you decide not to spend your money but put it in your Zopa account, you could potentially help fulfilling someone else’s dream!

Head over to their website for more information! And please, if you’ve had any experience with Zopa at all, leave a comment and have the rest of us benefit from your knowledge!

Bookmark It

Hide Sites