THESE are lean times for borrowers seeking affordable loans and savers looking for decent returns. So it's no surprise that the two parties are turning to each other for the rates they can't get from the banks, courtesy of social lending website Zopa.
It sounds unlikely and it doesn't come with a government-backed guarantee, but the site, where those with spare money lend it to those who need to borrow it, is booming as banks tighten their lending criteria and cut their savings rates.
Since it
launched in 2005, over 220,000 Zopa users in the UK have lent nearly £30 million to each other. And the premise is simple.
Lenders set the interest rate at which they want to lend, how much they lend, the return they want and the risk level of the typical person they want to lend to. The latter factor determines the return available – the riskier the type of borrower chosen, the greater the rewards. Those lending to the least risky groups have enjoyed average returns of 10 per cent in the last six months (after the 0.5 per cent fee is deducted), with the rate up to around 11 per cent for loans to borrowers considered more risky.
"Savers may now be tempted to turn to these sort of options to get a decent return on their savings in the current environment, as the potential returns look good as long as you don't get hit by bad debts," said Andrew Hagger, head of communications at Moneynet.
Meanwhile, borrowers – who typically need the money for home improvements, buying a car or to consolidate other loans – can apply for loans of between £1,000 and £15,000 and can pay off the debt early with no penalty. A borrower looking for a £5,000 loan on a three-year repayment term can currently get a best rate (for those considered the lowest risk) of 7.2 per cent, equating to monthly repayments of £154.39. The best deal currently available on the high street is 8.8 per cent, from Alliance & Leicester.
"Our lenders have put their loans up a bit in the past few months but they are still typically 20 per cent cheaper than from the banks, who have been putting loan prices up even for the most creditworthy borrowers." said Giles Andrews, co-founder of Zopa.
However, as Sam Owens of Moneyfacts pointed out, high street banks are not the main competitors in the loan market. "You don't typically get lots of high street banks in the best buys. The most competitive deals tend to be from supermarket personal finance brands, such as Sainsbury's and Tesco."
Nevertheless, Zopa has unsurprisingly grown in popularity as the economy has declined and confidence in high street banks has waned, with twice as much lending a month than there was a year ago. What used to be an advantage for the banks – their safety and security – has become an advantage for Zopa.
"The level of anti-bank feeling and mistrust of banks is probably at an all time high and in the current climate I think Zopa has the opportunity to become a credible alternative to traditional high street financial institutions," said Hagger. "The loan rates on offer for £5,000 are currently being shown as between 7.6 and 9 per cent APR for A and B rated borrowers, so not out of line with traditional providers."
The concern that most would-be lenders have is the possibility of their loan not being repaid. Crucially, however, exposure to risk is controlled as anyone lending £500 or more has their money spread across at least 50 borrowers.
The default rate hasn't changed in the last year, staying well below bank default rates at less than 0.1 per cent. There's no guarantee the rate won't increase, something would-be lenders have to consider. But Zopa insists its affordability and credit checks are more robust than those carried out by banks, with the creditworthiness of borrowers verified by agencies such as Equifax, much as a company's stability is scored by ratings agencies such as Standard & Poors. According to Zopa, Scotland has a far higher proportion of members categorised as being the safest for lenders to lend to.
This is why the site isn't a fallback option for subprime borrowers with a chequered credit history.
While Zopa has a Consumer Credit Licence with the Office of Fair Trading, it isn't covered by the Financial Services Compensation Scheme. However lenders' money is ringfenced in an account that the company cannot access, so it is safe in the event of Zopa going bust. All lenders and borrowers are in a legally binding contract, while Zopa, which charges lenders 1 per cent on money lent out and borrowers a fixed £94.25 fee, manages the repayments.
LENDERJAMES Watson, 33, of Kirkcaldy, admits to being slightly hooked on Zopa, checking it regularly to follow the progress of the borrowers to whom he is lending money and to share stories with other users.
But the initial reason he began using Zopa, after finding it on a comparison website, was the savings rates on offer. A combination of falling high street savings rates and concern over the security of
money held in banks made Zopa an attractive alternative to bank savings – especially when he is now getting 13 per cent return on his £5,000
"In the current situation a lot of people are drifting away from banks and looking around for new opportunities," said Watson. "That there is currently over £800,000 of lending available on the Zopa marketplace, whereas just last weekend there was only £400,000, shows that."
Watson, a systems analyst, lends money across the whole Zopa marketplace, rather than stipulating a specific risk profile, so he benefits from higher than average returns. "You can also create a listing where you can commit to individual requests, based on what they say. A third of my money is invested this way and the rest across the lending marketplace."
BORROWERWHEN she needed a short-term loan to buy some furniture, Jo McLaughlin, of Forres in Moray, knew she would be able to pay it back within less than a year, making the idea of committing to a longer repayment term unappealing.
So when she checked comparison websites for affordable loans that didn't tie her into a contract and discovered that Zopa offered one of the lowest repayment rates, her interest was piqued.
"I initially chose Zopa because it was significantly cheaper than the other rates and I could pay it off when I wanted. But it's like a money eBay, with a human angle, so I also felt like I was getting involved with something."
McLaughlin took the loan a year ago and paid it off within around eight months. "The early redemption was a big factor, because if I want to pay something back earlier, why shouldn't I be able to? It gave me more control of my money."
