Zopa! Who? Reviewed.

I have been lending on Zopa's UK site for just over 2 years and am constantly being asked by both potential lenders and borrowers what zopa is and is it safe etc etc. So here i will try and give a brief explanation of both zopa and peer to peer lending and also my own experiences to date. Zopa actually stands for zone of possible agreement and was the worlds first peer to peer lending company being launched in the UK in March 2005. So what is? Well Zopa and peer to peer lending is where a group of people pool money together to enable a borrower to use the funds to take out a loan. So it is an alternative to banks as the interest paid by the borrower is paid directly to the lenders who lend the money through the zopa mechanism.  So how does it work? Zopa offers two options listings and markets. In a listing a borrower says that they want to borrow for example £5,000 @10% over 3 years. Lenders then decide if they want to lend and make offers e.g £100 @5% £20 @8% £50 @15% etc. Starting with the lowest offer the loan is made up of the cheapest offers from lenders until the £5,000 is reached to give a blended rate. So the final rate zopa rate could be more or less than the 10% rate requested and the borrower having had an offer made at the blended rate can decide whether to accept the offer or not. If it is accepted the lenders receive interest at the rate they chose to lend at before fees. In the Markets Zopa offer loans which as classed as A* A B & C. These classifications relate to a borrowers credit worthiness so an A* borrower would expect to be offered a better rate than a C borrower. The rating given to a borrower is assigned by zopa when an application is filled in. Zopa is very strict when it comes to credit checking so those with a poor credit history who have for example been rejected by a bank for a loan won't find zopa an alternative as zopa will reject them too. Each lender decides which markets/terms they want to make offers in and then sets an amount (which can be as low as £10) and the interest rate they want. Zopa actually allows lenders to set a figure based on the return after the fee and bad debts to simplify things. As with Listings if X wants to borrow £5,000 the loan will be made from the lowest interest offers to produce a blended rate. Examples of offers made on 20/09/2009 sbradford offered £5,000 @9.31% TimGCull1060 offered £15,000 @8.66% Is it Safe?? For borrowers 100% as it is no different to taking out a bank loan as a figure is borrowed then a monthly repayment is made to zopa which is subsequently paid to lenders. For lenders it is important to factor in bad debts and the zopa fee as a 7% return might sound great with interest rates at only 0.5% but bad debts could see this figure halved or even worse. Personally i set my rates at 10% after bad debts and zopa fee which equates to 15.70% in C36 market, 11.00% in A*36 and 12.10% in B60 market. It means i miss out on a lot of loans but allows me to sleep at night not worrying about my returns turning negative because of bad debts. Also don't forget that Zopa credit checks all applications for loans and loans are only available to those Zopa believes are credit worth with a good/excellent credit rating. Since starting over 11,000 loans have been issued in the UK by zopa and its members worth over 50 million pounds.

Zopa from a lenders perspective

Having been lending for over two years my returns to date before bad debts but after the zopa fee are 9.88%. Having taken £114.20 of bad debts so far this return drops to 8.73% which personally i can't complain about. One thing to bear in mind though is that this return from zopa is ultimatelly diluted because money in the holding account waiting to be lent out is not earning any interest so for new lenders it is better to drip feed funds in than to place one large lump sum in at the start. I also have 27 late payers so the return will be influenced on how many of these turn into bad debts. For people new to Zopa yes 27 sounds a lot but that is out of 744 loans made over 2 years so under 4% which hopefully my lending rate has budgetted for.