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It's touted as the new model of savings and loans to replace our broken banks. Rupert Jones examines Zopa.com, the website that matches up depositers and borrowers?
Capitalism isn't Working was the slogan on many of the G20 protest banners this week, and more of us than ever would probably agree. The banks are broken and the near-collapse of Dunfermline building society has cast a cloud over the mutual sector. So how about cutting out banks and building societies completely? You could even earn 9% or more on your money.
That's not such a crazy idea as it might sound. Growing numbers of people have been discovering Zopa, a radical online financial "marketplace". Dubbed the eBay of banking, Zopa *allows people to borrow from and lend money to each other, thereby side*stepping the banks.
If you've got some spare cash, you can lend it directly to people who want to borrow. There's not a bank manager in sight. However, what's arguably made Zopa a really appealing proposition is the combination of plummeting interest rates and the lending clampdown brought about by the credit crunch. Savers who not long ago were getting 5% or more on their cash are now getting far less, while many borrowers have been unable to obtain loans at sensible rates.
Zopa says that over the past 12 months, its lenders have enjoyed an average annual return of 9.1%. However, those who were happy to take a bit more risk by lending to people with less than spotless credit records have made 10% to 12%. At a time when many "best-buy" savings accounts are offering 2% to 3%, that's pretty tempting. But on the other hand, many people will be nervous about getting involved with a company they have never heard of and which isn't part of the Financial Services Compensation Scheme.
Person-to-person lending
So who is behind Zopa, how does it work and what are the catches?
Zopa – "zone of possible agreement" – describes itself as "the world's first person-to-person online lending exchange". It is financed by the venture capitalists who backed companies such as eBay, and went live in March 2005. It has more than 260,000 members in the UK (it also operates in Italy and is working on a Japanese operation, but withdrew from the US last year), and has arranged more than £37m in loans.
Zopa is open to UK residents aged 18 and over with a current account, though the minimum age for borrowers is 20. Pretty much anyone is welcome to lend money, but Zopa admits it is "picky" when it comes to borrowers: they need to have a good credit record. All borrowers are *identity-checked, credit-scored and risk-assessed, and Zopa says it turns away 50% of those who apply because their credit record is not as good as it needs to be, and/or they are trying to borrow too much money. People with county court judgments, high levels of unsecured debt or poor histories of credit repayment will not be allowed through the virtual doors.
When a borrower is accepted, they are assigned to one of five "markets" – A*, A, B, C and Young. As you might expect, A*-rated borrowers are those with the highest credit scores. Young market borrowers are aged 20 to 25 and often have very little history of repaying debt, which means they can find it hard to get unsecured loans.
Many of Zopa's lenders are disaffected savers who decided they could get a better return by lending their money out. Once you have joined as a lender, you can lend anything from £10 to £25,000 (above this amount, you must apply for a consumer credit licence). You pick a market, depending on the level of risk you are happy to take. You choose the length of time you want to lend your money for – three or five years – and set the interest rate you are happy to accept. You then transfer the money into your Zopa account and it is made available to borrowers at the terms you set. To diversify risk, your money is spread across a number of borrowers. If you lend £500 or more, it is spread between at least 50 people. This is designed to protect you if any of your borrowers default.
Be aware that it costs money to use Zopa – you pay an annual 1% fee on the amount you lend (borrowers also pay a fee). Someone lending £1,000 at 7% would earn £70 of interest each year if the money is always lent out and paid back, and would pay a fee of £10. All returns are paid without any tax deducted, so you should declare your gains to the taxman.
Zopa says that because it is a marketplace and not a bank, it cannot guarantee a level of return. "The amount you get depends on the rates you set, the credit level of the borrowers you lend to, and the amount of bad debt you experience."
Beware bad debts
The mention of bad debts will alarm some, but Zopa is keen to stress that its bad-debt rate is low – currently around 0.3%. This is much lower than the rates for many banks, and also lower than the estimated bad-debt rates that Zopa gives on its website, which it says lenders should consider when setting their rates. For example, the estimate for the A* market is 0.4% to 0.5%, rising to 3.1% to 3.8% for the C market. If the recession deepens, you can probably expect bad-debt rates to rise.
Bad debts will bring down your rate of return. For example, that 9.1% average annual return takes the lender fee into account, but not bad debts. *Lopping off 0.3% reduces it to 8.8%.
For many, the number one question will be: is Zopa safe? Kevin Mountford at Moneysupermarket.com says people need to remember they won't enjoy the same compensation rights they would if they put their money into a bank or building society. Zopa's spokesman points to the checks it carries out on potential borrowers, the way it spreads your money around and that low bad-debt rate, adding that any missed repayments will be chased on your behalf by a collections agency. If Zopa went bust, the contracts between lenders and borrowers would remain legally binding, and until your money gets lent out, it is held in a segregated RBS bank account to which neither Zopa nor its creditors have any claim, he says. "We are not part of the Financial Services Compensation Scheme and can't be, because we are not a bank," he says.
One happy customer is Lynne Martin, a member for more than three years. She is lending around £80,000 and was getting a return of around 10%, though last time she looked it was 8.7%. Martin, 54, of St Albans, says that when the credit crunch kicked in, she took the view that her money was better-off with Zopa, as her risk was spread across hundreds of people rather than just one or two banks. Until recently her bad-debt losses were almost non-existent, though they have risen a bit in the last few weeks. However, she says she is not worried, because even if her bad-debt losses were to rise substantially, she would still be "quids in".
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