Virtual borrowers are reaping benefit of personal finance

Zopa may offer a human face, but are its rates competitive, asks Helen Monks

Six months since the launch of the eBay-style online person-to-person financial exchange website, zopa.com, members' ranks have swelled to more than 18,000 and amazingly, no one has been at the receiving end of bad debt.

Zopa allows borrowers and investors to dodge banks by creating a marketplace for individual lenders and borrowers. Would-be lenders display the amount of cash they are prepared to lend to other people for a certain length of time, with different vendors offering different interest rates.

This allows, for example, someone to offer a lower rate and specify they only want to lend to borrowers with a very high likelihood of paying it all back, or others to pick higher rates and take a punt on borrowers who might be slightly more likely to default. Borrowers - who can apply for loans up to £15,000 - can check out rates on offer and if they feel they are good value, agree to borrow without ever having to speak anyone who works for a bank.

New data suggests borrowers and lenders are both receiving strong rates from the exchange. The average gross return for Zopa lenders is 7.6 per cent before predicted bad debt, 6.4 per cent after, while Zopa borrowers are being offered 4.9 per cent APR typical for a £1,000 over 12 months.

Zopa argues that because it cuts out the middleman, everyone gets a great deal. Richard Duvall, the chief executive of Zopa, says: "We deal with the mismatch between people and banks. Our members tell us that banks don't have their best interests at heart; they resent the profits banks are taking out of the system and they dislike dealing with faceless corporations."

Zopa takes its cut by charging borrowers 1 per cent of their debt (though this charge has, so far been waived and is likely to remain ineffective until Christmas) and by taking commission when it sells repayment insurance.

Members are credit checked and asked to supply identification as markets are based on people's credit ratings. If your credit rating is average or low, you are likely to be denied access to lenders' cash. Importantly, Zopa borrowers are unlikely to struggle to get credit elsewhere.

All lenders and borrowers enter into a legally binding contract. Zopa manages the collection of monthly repayments and, if repayments are not made, uses the same sort of recovery processes used by banks. While Zopa has an Office of Fair Trading credit licence, it is only authorised and regulated by the Financial Services Authority in respect of its repayment protection insurance. The protection afforded to Zopa members by the Financial Ombudsman Service and Financial Services Compensation Scheme also only applies to insurance business.

There is also no protection for Zopa members under the UK deposit protection fund which would give lenders 90 per cent of their cash up to £20,000 if their borrowers default.

Some experts advise individual lenders (who are effectively investors) that for the extra risk, they should expect far better rates than they currently receive from Zopa. They also argue lenders and borrowers may be able to get better rates in the conventional saving and investments and borrowing markets. But Duvall argues Zopa is not trying to directly compete with bank savings: "You accept a bit more risk for a higher return and the satisfaction of knowing where your money is going."

However, there are other potential drawbacks to the exchange, including the chance that, on occasion, if you want to borrow there won't be any money available in a particular market, which is no good if you need to secure a cash injection fast.

Zopa is aiming to offer banking products on a human scale, offering an alternative to a world characterised by automated systems and mega profits.

It was this that attracted Simon Clark to the service, who recently lent £1,000 to Zopa borrowers. The 32-year-old management consultancy director from Wargrave in Berkshire says he was attracted to Zopa by the rates and also the ethics of the exchange.

"I wouldn't describe myself as particularly left-wing," he says, "but it's nice to know you're not filling the coffers of some bank."

Assuming his returns aren't seriously dented by bad debt, Simon says he intends to lend more soon.

Zopa believes people are better than banks - more responsible, price more fairly and competitively and are more rewarding to deal with and it will be launching new loan products - on six month, four and five year terms - within the next week.