Unfortunately for many Britons, it's impossible to do Christmas properly without a little borrowing. Credit cards are the usual weapon of choice for Christmas shoppers, followed closely by overdrafts. Some consumers, ignoring the punishing rates of interest, choose to load up the store cards, perhaps hoping that the new year pay packet will bring relief from the debt. But there is an alternative to the usual Christmas debt suspects that can work for both spenders and savers alike – the burgeoning world of social lending websites, or peer-to-peer lending as it's known.
The basic idea of peer-to-peer lending is for individuals to cut out the middle man – in other words, the banks. Online marketplace Zopa was the first to offer a viable way to do this and it is still growing in popularity. It has also paved the way for new sites. "Not surprisingly, a number of new peer-to-peer lenders have launched in the UK recently," says Giles Andrews, co-founder of Zopa. "This is good news as banks need to feel some real competition from outside their cosy club before they will finally do a better job for their customers."
Since its launch in 2005, Zopa has become a success story – in September total lending between Zopa members reached the £100m mark. One new site hoping to take its share is Quakle, which follows the Zopa model closely.
Getting a Zopa loan can be done in one of two ways – either as a standard loan or as a listing. With the former, lenders set their own interest levels and are matched with appropriate borrowers, based on one of five markets, A*, A, B , C and Young, which is for borrowers aged 20 to 25. With a listing, there are no risk groups and instead borrowers provide what is essentially a "loan advert" providing details on how much they want and why so that lenders can choose whether or not to lend to someone.
Quakle offers a loan application process that merges these two methods. As with Zopa, prospective borrowers are credit checked and graded depending on the risk they pose and assigned a grade from A to D. Quakle borrowers can then place a loan request, in the same vein as Zopa listings, of between £1,000 and £21,000. The requests are open for an "auction period" of 10 days, during which lenders can bid to cover a proportion of the loans and propose interest rates. Borrowers then pay a fee of 1.5 per cent of the amount borrowed.
"Looking at the site, there are half a dozen people prepared to pay between 19 per cent and 25 per cent for their loans," says Andrew Hagger from Moneynet.
At Zopa, members can borrow from £1,000 to £15,000, and although there is a £124.50 fee, this is incorporated into the interest rate paid so there are no up-front fees. There are no early repayment charges and, to give lenders peace of mind, each loan is split between other borrowers to reduce the risk. For example, lenders offering more than £500 will have their money spread over at least 50 borrowers.
Where Quakle claims to differ from Zopa is that members are encouraged to forge relationships on the site, inviting friends and family to join the network. In addition to the credit rating, users have a personal reputation score.
"The difference with Quakle is the social and community element to the site. People can get to know each other online and are given a reputation score, as well as a credit score, which is more like an eBay rating, based on feedback from other people on the site," says Joe Wiggins, spokesman for Quakle. "People can join forces with other like-minded people and help each other to get loans. Your score is influenced by your peers, so there's an added incentive to be financially responsible."
The recently launched Yes-Secure has also touted itself as a peer-to-peer lending site with a focus on social networking. Yes-Secure is the most generous in terms of loan limits, allowing members to borrow up to £25,000, paid over anything from one to five years. Again, individuals are credit checked and given a personal reliability score. Lenders decide for themselves the rate they will set, but Yes-Secure has recently reduced the cap on lenders' offered rate of interest from 35 per cent to 27.5 per cent across all six of its borrower markets.
Yes-Secure fees stand at 0.9 per cent of the loan for lenders and £80 for borrowers who are also charged a £25 fee for any failed payments. In contrast, Quakle does not charge its investors a penny to lend their money, taking all of its fees from the borrower. It is also the only peer-to-peer lending site to be regulated by the FSA as a small payments institution.
Irrespective of the method, the big selling point with all peer-to-peer lending is price. Average Zopa lending rates between November 2009 and October of this year were from 6.7 per cent for the most credit-worthy category and 11.4 per cent for Y class borrowers. With banks keeping the best rates on a tight lead, and mostly just for existing customers, these rates are impossible to come by on the high street. Zopa is an attractive prospect for lenders too: there is a 1 per cent annual service charge but lenders have enjoyed average returns of 8.2 per cent in the past year, which easily surpasses any rates available in the bond markets.
The question for the new kids on the block is whether they can match Zopa's success, but with any of these sites, it's important to note that a good credit history is still required. For anyone with blemishes, the top rates will still be out of reach so it isn't always the case that borrowers can't find a cheaper loan on the high street.
For those considering signing up as a peer-to-peer lender, the risks are even greater as social lending is not covered by the Financial Services Compensation Scheme. If borrowers default on payments, lenders could easily be out of pocket, but the good news is that default rates are low – at Zopa it is 0.7 per cent – and the companies all take action using a debt agency to chase any unpaid loans. With this in mind, social lending may well prove to be a rewarding addition to any investment portfolio, but only as long as those interested remember to proceed with caution.
"Don't put all your eggs in one basket; perhaps test the water with an initial investment and see how it performs," says Mr Hagger.