In the zone: the online exchange where people become banks

A chance to lend money to - or borrow money from - a total stranger may strike you as one to pass up, yet 150,000 people are doing just that.

The popularity of Zopa, an online money "exchange" that aims to cut out the middle man, continues to grow.

It has just picked up an award for its internet technology from specialist magazine The Banker, the irony of which is not lost on its creators, who have spent the past two years positioning their enterprise as an alternative to corporations. "The point of Zopa is that you are cutting out the banks and dealing with other people instead," says chief executive James Alexander.

Zopa won the award for its technology and its business approach - which is far removed from your average high-street bank. It brings people together to lend and borrow in what is dubbed a "zone of possible agreement". For borrowers, the website shows the best rates available - based on a credit score - and they either agree a loan rate or wait to see if better deals become available later.

As an individual lender, you can charge higher interest to someone with a poorer credit rating, though you could find that you have to lower your sights.

In practice, Zopa works by spreading lenders' money out among the borrowers and managing the collection of repayments. You can lend from as little as £10 for one to five years.

Lenders pay an annual fee of 0.5 per cent of the sum they've advanced, and borrowers pay the same fee. There are no other charges or early repayment fees.

Zopa claims that with no bank in the middle,"both parties get better rates", with returns of up to 14 per cent for some lenders and costs of just 6 per cent for some borrowers.

"The rates on offer from Zopa fluctuate daily subject to supply and demand," says Andrew Hagger of the financial analyst Moneyfacts. "Last Wednesday it was offering £5,000 over three years at a typical rate of 6.6 per cent for A-rated customers [the highest credit score]. This isn't too far out of line with the mainstream market, with Masterloan offering 6.1 per cent and Barclaycard 6.3 per cent."

While a rate of 6 per cent is on par with the most competitive loan deals, lenders could get better returns with other investments. The Halifax pays 6.5 per cent on its Web Saver one-year fixed-rate bond, for example, while Egg offers 6.05 per cent on its tax-free mini-cash individual savings account.

Justin Modray of independent financial adviser Bestinvest says that for those lending to the least creditworthy, returns could increase to 9.3 per cent.

To protect lenders, Zopa operates all the safety measures used by banks and is regulated by the Financial Services Authority.

'Banks have made enough out of us'

A recent Zopa convert, Chris Minshull borrowed £8,000 at 6.8 per cent last December.

"I decided to treat myself to a new car and started looking at the rates available on personal loans," says the 47-year-old.

"The search results came up with Zopa - a company I'd not heard of before - but once I'd had a look at what was on offer, I was really attracted by the proposition.

"[The rate] seemed reasonable, so I decided to go for it," he adds.

"The whole process was very straightforward and I like the idea of borrowing money from a group of people. The banks have made enough money out of us over the years."