Never a borrower nor a lender be? 48,000 people are happy to dance with a stranger

Is it too risky to exchange cash online? The success of Zopa suggests not
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The Independent Online

The idea of advancing your hard-earnt cash to a stranger might seem strange. Yet an online community called Zopa is doing just that, with members able both to lend and borrow from each other.

The futuristic name, an acronym of Zone of Possible Agreement, belies the old-fashioned business of exchanging money. It has attracted nearly 48,000 members since its launch last March.

The sales pitch of Richard Duvall - Zopa's founder and formerly the driving force behind internet bank Egg - is that, by cutting out the big banks, borrowers should get cheaper rates and lenders earn more than a cash deposit account could pay.

So far, borrowing rates have dropped as low as 4.4 per cent and helped Zopa hit the top of a number of "best buy" loan tables.

And those who clear their debt early do not face early repayment charges.

Lenders have also fared well on the exchange, says Mr Duvall. The average return on money in the 10 months so far is 7.3 per cent, he says. And that's after tax.

To date, there has been no incidence of bad debt.

Zopa makes its money by levying a flat, one-off fee on borrowers - set at 1 per cent of the sum borrowed. It also receives commission from the sale of payment protection insurance (PPI) to cover the loan - but this is optional.

For lenders, the service is free.

The company has now gathered enough momentum to draw up plans for a similar scheme in the US - with a launch date planned in the first half of this year.

Advisers in Britain have broadly welcomed Zopa's arrival in the market. "We are supportive of its innovative, community, approach," says Stuart Glen- dinning of the financial-comparison service Money- "It stands out and we hope it will succeed in giving the banks a run for their money."

The way it works is simple. Borrowers undergo a credit check by the ratings agency Equifax to determine their creditworthiness. They are then given a score - "A" for the top rating or "B" for the next best - that determines the rates offered to them in the exchange. The sums available run from £1,000 to a maximum of £15,000.

Lenders have a number of choices on the exchange: the amount of cash they want to advance; the rate of return expected; the length of the loan; and the type of person they choose to lend to.

Their choice, for example, might be to charge a higher interest rate to someone with a "B" rating.

The biggest sum that can be advanced is £25,000 and the minimum is currently £500 (although this figure is set to fall).

Clearly, these limits are at odds with those for borrowers, and that's because, in a bid to diversify risk, lenders must spread their funds among at least 50 different borrowers - with amounts capped at £200 per individual. This way, borrowers get their credit from a large pool of different pots of money. Lenders are paid monthly interest, which is collected by Zopa.

In a new move to entice members, lenders will now earn 3.25 per cent interest on any money offered as a loan which has yet to actually be borrowed - even though Zopa insists that lenders find homes for their money in 10 days.

"Lenders tend to be more sophisticated investors with spare capital," says Mr Duvall. "We warn them to expect some bad debt - and to work this into their expected returns."

Countering concern from some quarters that Zopa is risky, Mr Duvall insists it is a "safe and secure place to lend money". The exchange uses the same fraud-prevention systems as high-street banks and, should any borrower default, it will chase payment through a debt-collection agency as any bank would do.

Zopa has a consumer credit licence granted by the Office of Fair Trading and is authorised and regulated by the Financial Services Authority for the sale of general insurance.

Mr Glendinning adds that Zopa's rates are attractive for those looking to borrow small loans but points out that the application process is "quite protracted". He is also concerned that the low rates offered at present may be unsustainable.

Samantha Owens from financial analyst Moneyfacts argues that the deals available on Zopa depend on the "luck" of your timing. Over three consecutive days last week, for example, the best rate for a £5,000 loan over three years dropped from 6 per cent to 4.6 per cent.

This is because Zopa is a "live" market - so rates will depend on the lenders involved at that time.

She also warns that, at times - and particularly if you are trying to borrow larger sums - you may be faced with a message saying "funds are not available."

This happens, says Mr Duvall, with any new idea that relies on supply equalling demand. "It can take a while for lenders to offer money in a new market."

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