How To Get A Loan When The Bank Says No!

If you're having trouble getting a bank loan because you're a young borrower, this novel concept could be the answer. It's also a brand new way for investors to make money from the credit crunch!

What is Zopa?

Zopa, which stands for Zone of Possible Agreement, is an online social lending business which connects people, allowing them to lend to -- and borrow from -- each other. Think of it as an ebay for loans.  

Now you might be wondering why anyone would be willing to lend to people they don’t know. The answer is simple -- because the returns on offer to lenders can be very attractive. The rate the borrower pays will be set by the aggregate of all offers made by the lenders. Imagine earning 8% a year or more on money you have loaned out in the Zopa markets.

Isn't this risky? Well Zopa's been around since March 2005 and, so far, the default rate on Zopa loans is tiny at 0.04%.

And Zopa isn’t just great for lenders. Borrowers can get hold of money from their peers at competitive rates too. In fact, borrowing through Zopa measures up pretty well against loans available in the conventional market.

I think Zopa is a great alternative to ordinary lenders such as banks and financial services companies. And I really like the fact that it cuts out the banking middlemen. If you would like to find out more, read my article: Borrow At Bargain Rates Or Earn 10% A Year On Your Investments.

Zopa has been pretty successful so far, and it’s now gone one step further by opening up its market to younger borrowers. When Zopa first launched, borrowers had to be at least 26, but now anyone aged 20 to 25 can pitch for a loan too.

Zopa and the credit crunch

The credit crunch has forced many conventional lenders to push up the cost of loans because funding is now more difficult to come by in the money markets. But this doesn’t affect loans available through Zopa because they are funded by people like you and me.

The credit crunch has also caused lenders to become incredibly picky over who they will lend to. These days, a borrower needs a very good credit history to stand any chance of getting a loan at decent rates.

Zopa recognises young people, in particular, are finding it difficult to get accepted for conventional loans when they have a limited credit record. This has led to the launch of Zopa’s new ‘Young Market’ which is specifically designed for young, would-be borrowers who have been turned down by their bank -- or have been offered cash at ludicrously high rates -- simply because they have no, or a very limited, credit history.

How do rates for young borrowers compare?

The bad news is, if you’re a young borrower, you should expect to pay a bit more for your Zopa loan than you would if you had a perfect, detailed credit history. 

However, you should still find the rate on the Zopa loan cheaper than the rate you would be offered by a mainstream lender. And Zopa loan is also likely to be easier for you to get than a high street bank loan.

Why will Zopa lenders charge you more, if they are not affected by squeeze on funding in the money markets?

Simply because, as you have had little or no credit in the past, it’s more difficult to judge how well you’ll manage your loan.  In this way, lending to you will be considered higher risk than lending to a borrower with a proven track record.

So, in return for this extra risk, Zopa lenders will want a better return. Let's say you want to borrow £5,000 over three years. If you were an A* rated borrower (the highest credit rating you can get), you would typically be offered a loan of around 8.4% by Zopa lenders. But for younger borrowers with little credit history, the rate for the same loan could be around 12.7% APR. (NB: The actual rates will vary depending on the offers received from lenders.)

Remember, Zopa takes it cut too. Borrowers pay a fee of £94.25 for their loan, while lenders pay an annual fee of 1% on the money they lend out.

Looking at the total repayments, this means a young borrower could end up paying just £328 more than an A* borrower for their loan. Take a look at the figures:

Borrowers in the A* market are the most creditworthy. Borrowers in the C market still have a higher credit score than most of the population. Rates were taken from the Zopa market on 8 August 2008.

Of course, this could be even more attractive to lenders who stand to earn a greater return by taking more risk in lending to a younger borrower. Over the last 12 months lenders have made an annual return of 8.2% (after fees and before bad debt) on the money loaned out, but this could be pushed up even further by lending through the Young Market.

Is lending to a young borrower risky?

Zopa will credit check young borrowers in exactly the same way as anyone else. Those with a poor credit history or who want to borrow more than you can afford, will be turned away. 

Zopa’s Young Market gives responsible younger borrowers financial help which they may not be able to get anywhere else. While lenders who are willing to take on a little more risk could enjoy an even better return.

More:  How To Get Cheaper Loans | Visit Zopa's website