Zopa. Neither a borrower nor a lender be!

MSE_Martin · 7 March 2005 at 7:31PM

Update Note 2 March 2006

Well zopa has now been around a long time and finally its rates, in some limited circumstances, have got competitive ( see updated cheapest loans)

The fact that this is possible, is rather worrying in some ways. Why people are willing to lend at 4.6% when they could put it in a savings account and earn more, i don't quite understand. However the fact that they are means cheap borrowing is now available and thus moneysavers should grab it.

I have left my original notes from when Zopa launched for info on how things have changed:
__________________________________

'Neither a borrower nor a lender be' (with Zopa anyway)

Today Zopa the new 'freeform' borrowing organisation has launched with a leap of hype over product.

The idea seems simple, its calling itself the 'ebay' of financial services - "we'll find someone who wants to lend money and a borrow and put them together and charge just 1% for it."

The logic behind 'cutting out the middleman' may seem good, but with cold hard rationale, there are currently no circumstances where any consumer could benefit from it either as investor or borrower!

What you need to make it worth being a lender?

The top saving account with instant access pays 5.35%. So you would need to at least be earning more than this before it is worth putting your money with Zopa and as Zopa is much riskier, actually you'd want substantially more.

What you need to make it worth being a borrower?

Zopa is currently only lending to individuals with high credit scorers.

The cheapest personal loan on the market is 5.7% by Barclaycard (see cheapest loans article), though this is rate for risk, yet Zopa's customers should be fine. Yet Zopa's big sell is ''unstructured lending.

For that the real equivalent is a credit card, and by playing the credit card system you can get long term permanent debt at 3.9% (see half price precision plastic loans article) via the Texaco credit card (though you have to play a little to get it there). Whilst this may take more of a play, Texaco is backed by Lloyds TSB, who certainly are 'safer' than a new company.

Some have also said "Zopa is suitable for short term borrowing" and this is its real strength. Again I would simply say there are better ways to get a loan in the short term (see short term loans completely interest free

It doesn't add up

This means no borrowers should be paying more than 3.9% and the very least a lender should want in return is 5.35%.

.... and there's more

Yes there's more that's not mentioned. You won't see anywhere on the main bit of the site an answer about 'tax'. If you are a lender (or investor as i prefer to think of it) then you will be taxed on your extra income - apaprently this tax is not at the savings rate (20% for basic rate taxpayers and 40% for higher) but at the income tax rate (22% and 40%).

Plus the regulation of this is interest. The fact it'll use debt collectors to get unpaid debt.

Frankly at the moment Zopa wins my BARGEPOLE WARNING as in don't touch it with.

Martin

Debt_Free_Chick · 7 March 2005 at 7:38PM

And if the borrower defaults, the debt is sold to a debt collector. The good news is you get share of what the debt collector pays. The bad news is that debts are sold on for about 20% of the outstanding amount!

deemy2004 · 7 March 2005 at 7:54PM

If only it was possible to borrow from the banks at say 6% and lend the zopa clients at say 8% would be pennies from heaven ...........

Unfortunately Zopa has the makings of hell for the lenders......... :eek:

If people want to up their return with some extra risk, then why not lend to companies ?, i.e. corporate bonds.

Lakeuk · 7 March 2005 at 10:42PM

You would also have to lend well above the return you wish to achieve as very.

Example below is very crude be demonstrates my point :-

Say you lend £1200 @ 6% over 12 months, at the end of each month you get one twelth of 6% of the outstanding balance plus that months instalment - so instead of the £72, you actually get £33. You need to re-lend your received instalments to get the £72, but then you're in a tied in circle.

peterfleet · 7 March 2005 at 11:56PM

I think the Zopa, we are like the ebay of the lending and borrowing world, newspaper article in the Times, was just kite flying. And very successful at grabbing attention it has been.

As the detail emerges it seems worthless IMO to potential lenders.

MarkyMarkD · 8 March 2005 at 12:41AM

I can't believe the number of apparently sensible people they have on their board - they should all know better.

The idea of person-to-person lending, apart from in a personal capacity, is nonsense.

Reestit_Mutton · 8 March 2005 at 3:00AM

MSE_Martin wrote:

'Neither a borrower nor a lender be' (with Zopa anyway)

Today Zopa the new 'freeform' borrowing organisation has launched with a leap of hype over product.

The idea seems simple, its calling itself the 'ebay' of financial services - "we'll find someone who wants to lend money and a borrow and put them together and charge just 1% for it."

The logic behind 'cutting out the middleman' may seem good, but with cold hard rationale, there are currently no circumstances where any consumer could benefit from it either as investor or borrower!

What you need to make it worth being a lender?

The top saving account with instant access pays 5.35%. So you would need to at least be earning more than this before it is worth putting your money with Zopa and as Zopa is much riskier, actually you'd want substantially more.

What you need to make it worth being a borrower?

Zopa is currently only lending to individuals with high credit scorers.

The cheapest personal loan on the market is 5.7% by Barclaycard, though this is rate for risk, yet Zopa's customers should be fine. Yet Zopa's big sell is ''unstructured lending.

For that the real equivalent is a credit card, and by playing the credit card system you can get long term permanent debt at 3.9% via the Texaco credit card (though you have to play a little to get it there). Whilst this may take more of a play, Texaco is backed by Lloyds TSB, who certainly are 'safer' than a new company.

It doesn't add up

This means no borrowers should be paying more than 3.9% and the very least a lender should want in return is 5.35%.

.... and there's more

Yes there's more that's not mentioned. You won't see anywhere on the main bit of the site an answer about 'tax'. If you are a lender (or investor as i prefer to think of it) then you will be taxed on your extra income - apaprently this tax is not at the savings rate (20% for basic rate taxpayers and 40% for higher) but at the income tax rate (22% and 40%).

Plus the regulation of this is interest. The fact it'll use debt collectors to get unpaid debt.

Frankly at the moment Zopa wins my BARGEPOLE WARNING as in don't touch it with.

Martin

Martin,

I'd like to comment on your post from the viewpoint of a potential lender...

We all know that, despite there being cheap (often free) credit available on credit cards, there will always be plenty of people who will borrow from a company such as Zopa as it will inevitably beat the prices on offer on high-street loans and, despite your valliant efforts to educate the masses, there will always be a significant minority of people unaware of the benefits of a good low interest/interest free period on their credit card.

Anyway, the 5.7% loan rate you quoted in your post is very unlikely to be offered on a sub-£5000 loan over a short period of time - c.f. Alliance & Leicester who quote a headline rate of 5.9% on loans of more than £5000 but 12.5% on a £4000 loan and as much as £17% on a £1000 loan. This is where I see the market for Zopa - sub-£5000 sums at reasonable rates for those unaware of how to use credit card offers effectively.

Furthermore, Zopa allows the borrower to pay off their loan early if they wish - something that the average high-street lender doesn't allow.

Anyway, even taking the above into consideration there is one very worrying aspect of Zopa for lenders...you must have the funds in your Zopa account before you can make an offer to lend and Zopa will not pay you any interest for money lodged with them while it's waiting to be lent out. With your money having to be split among a minimum of 50 borrowers you could be waiting a long time before it's lent out and, what's more, as it gets repaid to you month by month you will continually (on a month by month basis) have to reoffer it on their lenders market if you want the money to continue to work for you.

Seems a lot of work for money that will probably end up being unutilised for anything up to 20% of the time (infact probably longer in the early days while they build up their customer base) - whatever returns you may be able to estimate for your money you will inevitably have to scale them down by up to 20% to factor in this dead-time thus increasing the minimum rate of return required to make it a worthwile alternative to a savings account.

In short - I agree with your sentiments (from a lender's point of view) but for reasons not mentioned in your post.

RM

CTT_2 · 8 March 2005 at 10:22AM

Out of interest I registered last night with Zopa and after a few questions regarding my credit file they came back and said I have a score of 486.
Does anyone know whether this is good or what. I then applied for a loan but could not get anything higher than 1000 pounds stg.
With thanks,

Reestit_Mutton · 8 March 2005 at 12:19PM

CTT wrote:

Out of interest I registered last night with Zopa and after a few questions regarding my credit file they came back and said I have a score of 486.
Does anyone know whether this is good or what. I then applied for a loan but could not get anything higher than 1000 pounds stg.
With thanks,

Yes...486 is good.

If you read their FAQs, it says that 50% of the population are above 400 and 30% of those people are above 470. I think that means that you are in what they consider to be the top slice of the population.

As for only being able to borrow £1000 this is only because the market is young. As everyone has to spread their money between at least 50 borrowers there is a maximum that each person can lend you based on their offer - if their offer is for £1000 then only £20 of that is available for you to borrow.

Add up the maximum that each person in that market can lend to you and you will probably reach a figure somewhere between £1000 & £2000. As more people enter the market, the maximum available to any one person will rise. However, this will take time.

Nonetheless, as Martin says, there are better ways to borrow the money e.g. Sainsburys platinum credit card gives you 0% on purchases for 12 months and a guaranteed minimum credit limit of £3000. You can apply for it as long as you have an income of more than £15K p.a.

RM

MSE_Martin · 8 March 2005 at 12:40PM

Hi Reestit, while i agree with your points I think this was covered in my argument. Zopa's big strength is 'unstructured lending' as such a better analogy is with credit cards than with loans. Hence why 'short term loans interest free' or the half price plastic loans article which i detail above are better comparitors and Zopa does even worse against them

martin

CTT_2 · 8 March 2005 at 1:31PM

CTT wrote:

Out of interest I registered last night with Zopa and after a few questions regarding my credit file they came back and said I have a score of 486.
Does anyone know whether this is good or what. I then applied for a loan but could not get anything higher than 1000 pounds stg.
With thanks,

Thanks for reply and it has saved me aready saved me £6.75. I applied for my Equifax credit file for £2.00 and they said I could obtain my credit score for £6.75, so by signing up with Zopa it has saved me that money.

Also would not take a loan from Zopa (as other contributors have already noted) there are a lot better deals to be sought elsewhere.

Zopa. Neither a borrower nor a lender be!

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