Zopa loans in detail
May 30, 2007
Zopa (Zone of Possible Agreement) was launched two years ago in Britain. Its aim was to match people willing to lend money with borrowers – each side complete strangers to the other. The website helps people find the point at which someone might pay for a loan to match the interest rate another person is willing to lend money. Zopa claim that they are cutting out the middle men (i.e. banks) to offer competitive rates. Rates can be as good as 14% for lenders and as low as 6% for borrowers – with no early repayment penalties.
So far 150,000 people have signed up – two thirds as borrowers and a third as lenders. James Alexander, managing director of Zopa, is frustrated that their rates remain excluded from comparison tables, and therefore “hidden†to table readers in newspapers. The average gross return for lenders is 6.75%, with Zopa taking a 0.5% fee.
Lenders bear the risk of defaults directly, but there is only a 0.02% default rate on the loans made to date. However, this risk is diluted by the fact that a loan is spread across a number of borrowers. For example, a loan of £500 will be spread across 50 borrowers. Additionally, borrowers have to submit to a credit check before a loan is agreed, using agencies such as Equifax, Experian and CallCredit.
On the website, lenders are asked how much they will loan, over what period, to whom and at what price. Borrowers look on the website to find lenders’ terms, and make their application. Borrowers have a rating based on their creditworthiness. Lenders can loan from £10 to £25,000, and borrowers can apply for loans of £1000 to £15,000. Upon acceptance of an application Zopa makes rue the interest is paid directly into the lender’s bank account, although there have been some technical problems leading to late payments. Zopa say these problems have been resolved now.
The contract between lender and borrower is legally binding, and Zopa manages the collection of monthly payments by direct debits. Non-payments by borrowers are usually referred to a debt collection agency – just as a bank would do. After 120 days of non-payment, the debt is sold to another financial company, and a lender is offered a final settlement.
Loans via Zopa are not protected, but the company holds a consumer credit licences from the OFT, and regulated by the FSA for the sale of payment protection insurance.
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