Borrowing and lending with "Zopa"

18.08.2005 An internet-based borrowing and lending platform has recently been launched. It is the first of its kind that allows individuals to borrow and lend money without having to pay extra charges like early repayment penalties High-Street banks impose.

Not only are borrowers freed from the hefty early repayment penalties, but lenders, not banks are the ones who set the rate of interest and borrowers choose the rate that suits them best. Because of this, extremely competitive rates are possible. In June, the best interest rates in Zopa corresponded to the most competitive interest rates of British banks. The principle is similar to that of eBay, and is backed by Benchmark, the same venture capitalists who funded eBay it in its early stages. The launch of Zopa coincided with the annual reports of banks. The reports showed that the four biggest banks in England together made a profit of ₤23.3bn last year. Whilst Zopa doesn’t make its profits through charging its customers to lend money, it makes ‘non-commercial’ loan agreements and takes a one per cent commission on the loan from its borrowers. {mospagebreak heading=How it works&title=The risks} So who can borrow and who can lend. Anyone over the age of eighteen can lend money, once it is their money to lend and not from a company and as long as they don’t have outstanding loans of ₤25,000. In order to qualify for borrowing money, you must have an income of ₤25,000 or more. If you don’t have this then you don’t qualify. If you do, then you have to give some personal details so that your identity can be ascertained. Following this, you have to submit to your information to the credit rating agency, Equifax, so that your credit rating history may be checked. Usually within two or three days you will know if you have been accepted. According to Zopa, about half of applications are denied. If you are successful then you will be able to borrow anything from ₤1000 to ₤25,000.
Whilst Zopa doesn’t offer any guaranteed returns, the risks associated with lending suggest relatively low possibilities. Because Zopa spreads each lending offer over at least fifty borrowers the likelihood of a lender getting back less than they put in is very small. In addition, they use strict credit referencing rules to be sure that potential borrowers won’t be likely defaulters and carefully monitors.
So far, the company is in its early stages and time will tell whether people are prepared to lend their money when there is no guarantee on a return. If people are willing to put their faith in the company, the benefits of lower interest and no early repayment penalties could mean banks have fewer people applying with them to take out loans.