Newest Review: ... on the market and tried out several approachs before it settled down to its current form. Ideas Zopa has tried and no longer offer are li... more
Lending without banks
Member Name: tirial
Date: 31/08/12, updated on 31/08/12 (188 review reads)
Advantages: Peer-to-peer, ethical, easy to use
Disadvantages: Returns vary, risk of default
Zopa is a peer-to-peer lending site, where borrowers apply for loans that are supplied not from a bank, but by other people. ZOPA stands for "Zone of Possible Agreement", which is the range of interest rates that lenders are prepared to offer and borrowers agree to pay. The best thing about Zopa is that lenders can offer a better rate of interest than a bank would pay them, and know that anyone borrowing is still getting a better rate than a bank would offer. It's not just a lending site - there is an active community and social forum behind it where users can chat. This social aspect is one of the biggest benefits of Zopa.
For borrowers, Zopa usually offers a pretty good interest rate and most people can quickly qualify for a Zopa loan in one of the bands, even if they may not qualify at a bank, as the lenders at Zopa can choose what risk they want to offer to. It is also useful for lenders. With the base rate at minimum and savings producing very little income, Zopa is one possible alternative for investors and people looking for a place for their savings. The rate of return varies, depending on the risk and length of time of the loan, and you can choose your targeted interest rate. If you set it too high, borrowers simply won't borrow and other lenders will be lent out first.
It was one of the first peer-to-peer sites on the market and tried out several approachs before it settled down to its current form. Ideas Zopa has tried and no longer offer are listings (effectively an auction site for loans, where borrowers made personal appeals), paying into the account through Paypal, and a full range of 1-5yearly loans across six markets. One thing that has stayed however is that Zopa loans can now be used as part of your Sipp (Self-Invested Pension Plan) so if you are looking to diversify away from shares and funds, this provides an option. However this option is only available from some pension providers, not all.
They have now refined these down to offer four main credit bands assessed by risk (A* to C), with two lengths of loan available in each, and a special seperate band (Y) for young borrowers such as students.
To apply for a loan, you say how much you need, and for how long. Their software works out what rate you qualify for and suggests it. If you agree then you can accept the loan. You can check the rate without being a member, but the site will not then supply a loan until it has run a credit check and assigned you to a band.
Lending is equally simple: once you have signed up you put money into your Zopa account by bank transfer and then create Lending Offers, setting the market duration and interest rate you want. Usually only £10 of your funds will go to any one loan, making sure the risk is spread if the borrower defaults, but you can raise this limit (in £10 blocks) to allow more to be assigned if you want to lend your funds quickly. All the lenders' offers for one market go into one pool for that type of loan and the ZOPA Zone interest rate is created from these. Your offer is then matched with requested loans, and assigned to them at your desired rate. The lowest requested rate is always offered first, which helps keep rates down.
Each month the borrower pays back as they would a standard loan, and each lender gets their share of the repayment added to their Zopa Account. You can set it up to automatically relend money at the rate you have set, so it doesn't simply sit there. One consideration for lenders is that Zopa income is paid untaxed, but qualifies for tax, so if you are a tax payer you need to declare it to the tax office.
One of my major initial problems with Zopa was that there was no way to get your money quickly, so I allowed my initial investment to lapse and withdrew the funds. However, they have solved this and now have a Rapid Release Option: you can sell the loans back onto the market and get your funds back. Another lender in the same market will take them over, crediting you with the amount. This costs you a small amount but does mean that your funds are not permanently unavailable if you have a genuine emergency.
Ethically Zopa is fairly sound - if anyone objects to big banks for example, it completely removes them from the equation, making it all about people. The funds currently in the lenders' Zopa accounts are held in a seperate secure account that is protected if the company goes down, so your investment is pretty safe. The social aspect actually means the rate of default is low: It's people lending to people, not a corporation. At any time it displays how much money is available to lend, what rates are on offer and a few nice titbits like borrowers' most common first name.
This gets a four because I liked the Paypal facility which they have withdrawn, because the returns may vary significantly, and because the tax paperwork may make it too much hassle for small investments (under £100).
I can't advise on the borrowing side of it, but as an investor I like it. Overall, this is simple, easy to use and a good way to diversify a portfolio.
Summary: An unusual way to save, or take out a loan.