Would you give a fistful of dollars to a stranger?

Esther Shaw looks at a new online service that unites people in need of loans with others willing to lend
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The Independent Online

There isn't much you can't buy on the web - and that now includes a stranger's money. Step forward the Zone of Possible Agreement (Zopa) an online lending exchange, unveiled last week, that hopes to cash in on consumers fed up with poor service and high charges from their bank.

There isn't much you can't buy on the web - and that now includes a stranger's money. Step forward the Zone of Possible Agreement (Zopa) an online lending exchange, unveiled last week, that hopes to cash in on consumers fed up with poor service and high charges from their bank.

Whether you're looking for a loan or have a few thousand pounds spare that you're happy to lend to others at a rate of interest set by you, the website - founded by Richard Duvall, the man behind the online bank Egg - will provide the service. "We have created [the site] for those who would rather lend and borrow directly with other people than continue to deal with faceless corporations," he says.

Both borrowers and lenders will undergo a credit check by the credit rating agency Equifax to determine creditworthiness.

As a borrower, your score - ranging from a strong "A" to a weak "D" - will determine the kind of rate offered to you, or indeed if you're offered any money at all.

As a lender, you will be able to charge higher interest to someone with a poorer credit rating - incurring a greater risk of default, of course.

There is no charge for individuals using the site to lend, but borrowers face two charges: a one-off fee to Zopa, set at 1 per cent of the sum borrowed, and the interest charged on top.

So, if you want to borrow £8,000 over two years, an £80 fee will be added to the original amount applied for.

It then works like a normal high-street personal loan: interest at the agreed rate over two years is worked out on this sum, £8,080, and repayment of the loan and interest is split into 24 fixed monthly instalments.

Since the site is new, lenders can give money only to borrowers in "A" and "B", the top two groups of creditworthiness. This amounts to 40 per cent of the population, Zopa estimates.

Individual borrowers can take out anything from a minimum of £2,000 to a maximum of £15,000 - the sort of sums available from banks - but lenders can offer substantially more: £25,000. However, they won't be offering a lump sum to just one individual; this is down to the way the system works, how Zopa manages the lenders' money, and the tight limits it places on exposure to debt.

Therefore, although lenders might have £2,000 to put into the mix, the most that will be routed to any one borrower is actually capped at £200. And any sum loaned - from a minimum £500 up to the maximum £25,000 - is spread in this way to at least 50 borrowers, who will also receive their credit from a number of different lenders.

Zopa manages the collection of monthly repayments and, if any money is not paid on time and the issue becomes serious, recovers it in the same way any high-street bank would - using a debt-collection agency.

Mr Duvall claims the exchange will give both lenders and borrowers a better rate of interest by cutting out the traditional bank overheads such as branches and managers.

Lenders could earn 30 per cent more than if their money was put in a cash deposit account, he estimates, and borrowers could get a loan for 20 per cent less.

However, potential lenders can also get attractive deals elsewhere - without having to pay tax on the interest. Rates as high as 6 per cent a year are available from a fixed-rate mini cash individual savings account (ISA).

The Zopa website is authorised by City regulator the Financial Services Authority and has a credit licence granted by the Office of Fair Trading.

But if you think this all sounds risky, you're not alone. Groups including the Consumer Credit Counselling Service and National Consumer Council (NCC) urge caution - especially with consumer debt in the UK running at an all-time high.

Lenders and borrowers who get involved are taking "a leap in the dark", according to an NCC spokeswoman. "Don't go in in a big way until you've tested the water," she says.

Given the prevalence of cheap unsecured personal loans available on the high street - as low as 5.7 per cent in some cases - demand from borrowers will depend on there being better rates on offer.

Richard Mason of the price- comparison website money-supermarket.com says the service could encourage those with poor credit ratings, and facing expensive rates on high-street loans, to investigate their chances of being offered credit on Zopa instead.

"[However], it's likely at pres-ent that their options will be similar to the main market."

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