Whether you want to borrow a cheap loan or earn a huge return on your investment, we have an innovative but increasingly popular solution for you...
If I told you how you could earn a great fixed return of up to 10% a year - without even going near the stock market - would you bite my hand off?
If I told you how you could borrow money at a bargain rate of just 6.5% - without being charged any penalties if you decide later to pay off your loan early - would you jump at the chance?
Sounds too good to be true, doesn't it? But it's perfectly feasible to achieve both these objectives through social lending site, Zopa.
If you've never heard of it before Zopa is an internet-based peer-to-peer lending business which enables lenders to achieve attractive returns on their cash while borrowers can get their hands on funds at competitive rates.
It's rather like an eBay for loans. It joins up the dots between investors and borrowers, and so cuts out the middlemen - the banks - adding not one penny to their coffers. This method increases the return for investors, allowing them to offer lower rates to borrowers. Here's how:
1) Would-be borrowers are given the opportunity to pitch for a loan from potential lenders. These lenders are, in effect, investors like you and me looking for a good return.
2) The investors-cum-lenders then bid against one other for the chance to stump up the cash at a desired rate of return. The interest rate paid by the borrower is the aggregate of all the best offers given for a particular loan.
Of course, this match-making service isn't a charity: Zopa takes a cut. So if you like the sound of all this, bear in mind you'll have to pay a fee of 0.5% of the amount you lend or borrow to take advantage of Zopa's lending service.
Is Zopa Good For Investors?
According to Zopa, users who have already put their hands in their pockets for their peers enjoyed an average fixed rate return of 7% in 2007, with many gaining returns of more than 10%. These returns are before tax, but after bad debt and Zopa's 0.5% fee.
These returns easily outdo most traditional savings accounts, but is it a safe way to make money? According to Zopa the default rate since launch is extremely low at 0.2% and all potential borrowers are thoroughly credit checked before putting a listing on the site. Zopa claims its credit assessment is more rigorous than many banks and conventional lenders.
But, remember, there's always a chance a borrower may not be able to keep up with their repayments. Anyone lending £500 or more will have their money spread across at least 50 borrowers to manage the default risk effectively.
Is Zopa Good For Borrowers?
The credit crunch is making Zopa rates increasingly attractive to borrowers. Many conventional lenders are putting up rates on all types of borrowing in the hope of recovering losses from bad sub-prime debt. This isn't an issue for people like you and me who are willing to lend through Zopa.
But how competitive are Zopa loans? The rates below show the typical repayments you might be charged compared with the cost of conventional loans. These figures are based on a loan £5,000 repayable over three years:
Typical Rates From Zopa
Lender | Typical APR | Monthly repayment | Total repayment |
|---|---|---|---|
Zopa - A* rated borrower | 6.5% | £152.92 | £5,505.19 |
Zopa - A rated borrower | 7.5% | £155.04 | £5,581.48 |
Zopa - B rated borrower | 8.7% | £157.56 | £5,672.17 |
Zopa - C rated borrower | 10.2% | £160.91 | £5,792.73 |
Monthly repayments include Zopa's 0.5% fee.
A* rated borrowers are those with the highest credit scores who would qualify for the most competitive rates. C rated borrowers still have a higher credit score than most of the population.
Typical Rates From Conventional Lenders - with early repayment charges
Lender | Typical APR | Monthly repayment | Total repayment |
|---|---|---|---|
6.7% | £153.25 | £5,517.00 | |
Barclaycard Personal Loan | 6.8% | £153.47 | £5,524.92 |
Masterloan | 6.8% | £153.47 | £5,524.92 |
Yourpersonalloan.co.uk | 6.9% | £153.68 | £5,532.48 |
The loans shown above are the best available on the conventional market at the moment and are only beaten by the typical rates offered to A* borrowers through Zopa. However, Zopa loans never charge any fees for early repayment of the loan so it makes sense to compare them with conventional loans that don't impose these costs either.
Typical Rates From Conventional Lenders - without early repayment charges
Lender | Typical APR | Monthly repayment | Total repayment |
|---|---|---|---|
Post Office | 7.9% | £155.82 | £5,609.52 |
AA | 9.2% | £158.61 | £5,709.96 |
Intelligent Finance | 9.7% | £159.68 | £5,748.48 |
Egg | 9.9% | £160.11 | £5,763.96 |
Zopa loans measure up well to similar conventional loans making them an attractive deal. But there's no way to guarantee the interest rate you would actually pay as that depends on the offers made by would-be lenders. That said, there's no way to ensure you'll get the typical APR from conventional lenders either.
Zopa reckons 2008 is the year social lending will break into the mainstream. I think it's an excellent solution for matching the needs of borrowers and lenders alike. You may well see it catch on soon, so why not be ahead of the crowd?
More: How To Get A Cheaper Loan | The Best And Worst Loans | If you're interested in social lending visit Zopa.