I you haven't heard of Zopa then it's well worth a look - I'm not easily impressed but these guys seem to have a simple product that is working well... It's all about the basic principles of borrowing and lending but there is no bank or big-name lender involved.

Zopa.com is the first people-to-people marketplace for lending and borrowing. Launched in March 2005 by the brains behind Egg and the backing behind eBay and Skype, it specialises in competitive borrowing and lending rates and attempts to match smaller lenders with borrowers. In 18 months, it has attracted more then 88,000 members with around 5,000 more signing up each month. Around two thirds are borrowers and about half of the lenders have already signed up to lend more than their original outlay. The company is just about to launch in the US.

Lenders can make loans from as little as £10 but once they lend more than £500, the money is spread between at least 50 borrowers, to minimise risk. The lender specifies how much they are willing to lend and over what period (between one and five years). They are then asked to choose the price at which they are willing to lend. If a lender's loan rate is too high, there will be no takers and the money will simply sit there earning the 3.5% paid by Zopa. Borrowers can apply for loans of between £1,000 and £15,000. They can trawl the Zopa website to see the terms on which lenders are willing to lend and apply accordingly.

Borrowers - who undergo a stringent vetting process - are rated A or B according to their creditworthiness and this will be factored into the interest rate they are offered. When a borrower finds an acceptable rate of interest he or she can apply for the loan. Once the application is accepted, Zopa arranges for the interest to be paid directly to the lender's bank account. Zopa makes its money through the fee paid by both lenders and borrowers of 0.5% of the loan. It also receives commission on the sale of optional payment protection insurance.

Zopa carries out full credit checks on all borrowers in exactly the same way as a bank would. It runs the normal checks via the electoral roll and credit reference agencies Experian, Equifax and CallCredit. Its rigorous procedures mean that only the top 50% of applicants are accepted as borrowers. Industry commentators say that it's precisely because Zopa is so fussy that it is able to keep its very low bad debt record of 0.05%.

Lenders and borrowers enter into a legally binding contract with each other and Zopa manages the collection of monthly repayments. If a repayment is late, Zopa levels a fine. It also uses the same recovery processes that banks use. After 120 days of default, a debt recovery agency sells the debt on to another financial institution, at which point the lender is offered a final payment and the outstanding debt is written off. Zopa is not a bank, so loans are not protected in the same way as bank and building society deposits. Instead, it holds consumer credit licences from the Office of Fair Trading and is authorised and regulated by the Financial Services Authority for the sale of payment protection insurance.

What's in it for lenders

At the time of writing, Zopa lenders are achieving an average return of 6.8% gross (after Zopa's 0.5% fee but excluding tax) but some lenders have recieved as much as 14%. Then there is the transparency - lenders can see exactly who they are lending to and what those borrowers are doing with the money. Reasons for borrowing have ranged from publishing a sci-fi trilogy to IVF treatment, solar heating for a bungalow, Newcastle United season tickets, funeral expenses and lots of weddings.

Zopa covers its lenders for any fraud or identity-theft risk but the lender takes the credit risk. Any missed payments are chased on the lender's behalf by a debt collection agency - the same process used by the high street banks. 'Everyone is authenticated and validated,' explains co-founder James Alexander. 'We check that people are who they say they are. We work with all three credit reference agencies and accept borrowers only after a direct debit has been established. We ask more questions on our application form than a typical bank - we even ask people about their eBay feedback ratings. It is a different measure of trust, but it can be useful.'

What's in it for borrowers

The benefits for borrowers are that interest rates can be lower than those charged by traditional lenders and that there are no early repayment penalties - the subject of a new campaign by Zopa. This has made Zopa particularly attractive to the self-employed and others who, because they have fluctuating earnings, may find it difficult to borrow from the banks and may also wish to repay loans early. There is also the personal element and knowing that someone is getting a good deal by lending to you - not taking you for a fool.

Money saving expert Martin Lewis (for it is he) says: 'Zopa is a reasonable option for someone with a very good credit record to check out what someone on Zopa is willing to lend them. But for anyone with a poor credit history, I would never recommend that they apply to Zopa as it will simply leave an unwanted footprint on their credit reference files that they have applied for credit and been rejected.''

What else?

Because of its flexibility and transparency, Zopa is now able to set up partnerships so that lenders can choose to offer loans to certain groups of people. One is with Notting Hill Housing Trust, which houses about 55,000 low-income people who find it hard to borrow because they've no assets to put their loan against. They're getting rates from the rest of the world from between 30% to an incredible 300% with pretty unpleasant collection regimes. Zopa works with the Trust and uses its knowledge of rent payments to help assess tenants ability to repay a Zopa loan. This way, Zopa hopes to offer something more in the region of 18% interest giving lenders returns of around 10%.
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