Zopa Takes the Bank Out of Banking With Peer to Peer Lending

By Rachel Schramm - 29/12/2011 07:00:00

Zopa is taking personal loans to an all new level. They're removing the bank from the equation, and helping individuals make and engage in peer to peer lending. That way, if someone is looking for a loan, they can just use Zopa to borrow online directly from another person. 

 

How Peer Lending With Zopa Works

According to Zopa, peer to peer lending on their network is more efficient, principally because borrowing from another person is less costly than borrowing from a bank, and because individual lenders can profit by making smart loans.^[1]  Here's how Zopa's social lending model works:

 

1. Zopa checks on potential borrowers credit scores, sorting them into groups so that lenders can tailor their offers based on risk factors^.[1] 

2. Lenders make a specific offer based on a borrower's group. For example, they may offer an “A” amount to the “B” group of borrowers at a “C” rate.^[1] 

3. Borrowers decide if the offer is attractive to them, and accept if they find the terms agreeable.^[1]

4. The two individuals enter into a legally binding contract^.[1]

5. The borrower gets their money and the lender gets repaid using direct deposit^.[1] 

6. Zopa profits from the fees they charge borrowers upon approval, and the 1% annual fee they charge lenders.^[1]

  

How much does it actually cost?

 Overwhelmingly, borrowers choose peer lending with Zopa because it costs them less, and they can repay early without facing any penalties.^[2] In fact, Zopa CEO Giles Andrews explains that some borrowers may get an APR that's around 20% lower than what they'd receive from a bank.^[2] Since Zopa calculates interest on a daily basis and charges borrowers no early repayment fees, individuals can save quite a bit by choosing to repay their loan early.^[3] Borrowers should take a careful look at the borrowing fees that Zopa charges before they take out a loan, though. The fees decrease as the loan amount increases, so that a loan of  £5,000 has a £130 fee, but a loan of £7,500 has a £10 borrowing fee.^[4] Even so, individuals choose their peer to peer lending network because they can save, and because they can bypass the bank bureaucracy all together. 

  

What's in it for lenders?

Lenders can use Zopa as an alternate savings account, making profit on p2p lending by making smart loans to borrowers in the appropriate categories. If lenders choose to be a little more liberal with their loans, they could charge a higher interest rate, and make more profit on the returns. Very often, though, Zopa allows lenders to engage in very responsible peer to peer lending, using Zopa's lending model to make smart decisions when it comes to whom they're going to lend. In fact, online personal loans have a low default rate, says Giles Andrews, because peer lending offers a "better credit model, taking more account of over-indebtedness and affordbility".^[5] Zopa reports that, on average, their lenders see annual returns of around 6.4%.^[4] 

 

Peer to Peer Lending is on the rise 

 

With the onset of the holidays, Zopa is anticipating an estimated 50% jump in peer to peer lending; often, borrowers use these online personal loans to settle up their credit card debt, so they can pay lower interest rates.^[5] This social lending alternative has shown real potential. As more borrowers turn to online personal loans, this new form of lending becomes a more established and accepted form of financial transaction. 

 

References

 [1] "P2P Lending: How It Works." Zopa. 2011: n. page. Web.<http://uk.zopa.com/ZopaWeb/public/about-zopa/big-idea.html>. 

 

[2] Atkin, Joanne. "Borrowers want low APR and early repayment without penalty." Mortgage Finance Gazette. 06 12 2011: n. page. Web.<http://www.mortgagefinancegazette.com/personal-loans/borrowers-want-low-apr-and-early-repayment-without-penalty/>

[3] "Frequently Asked Questions." Zopa. 2011: n. page. Web. 27 Dec. 2011.<http://uk.zopa/com/ZopaWeb/public/help/help-faqs-borrowing.html> 

[4] Stanier, Joel. "How Safe Are Peer-to-Peer Loans?." ThinkMoney. 13 12 2011: n. page. Web. 27 Dec. 2011. <http://www.thinkmoney.com/loans/news/how-safe-are-peer-to-peer-loans-0-5065.htm>.

[5] King, Brett. "P2P Lending Gets Ready to Explode for Christmas." Huffington Post. 19 12 2011: n. page. Web. 27 Dec. 2011. <http://www.huffingtonpost.com/brett-king/peer-to-peer-lending_b_1147957.html>.