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The
website, Zopa, puts borrowers
in touch with people who are willing to lend them money, charging
a fee equivalent to 1% of any loan made. Richard Duvall, Zopa's
chief executive, said that it allowed people to take control
of their borrowing rather than "deal with faceless corporations."
But there is growing concern that UK consumers are already
overburdened with mortgage and credit card debts.
Is it credit worthy?
Lenders set their own rate of interest, and choose which borrowers
they want to lend to depending on what risk they want to take.
It is adviseable to approach this with extreme caution.
In theory, the less credit worthy the borrower the higher
the rate of interest on the loan.
"Zopa is for people looking to be in control of their
money, people looking for the rate that's right for them,
people looking for a better rate and people keen to cut out
the middleman," Mr Duvall said.
Risk for the lender is reduced as Zopa spreads loans to at
least fifty borrowers and caps the lender's exposure to any
one borrower at £200.
The website is authorised by the Financial Services Authority
(FSA) and has been granted a credit licence by the Office
of Fair Trading.
What is the concept?
People with spare cash can offer to loan it to people who
need to borrow, through the Zopa exchange.Similar to eBay
and Betfair, an online betting exchange, where the aim is
to avoid the middle man.
Currently, when looking to borrow money you can either use
a bank, building society or other loan company. If you want
to lend money to someone you have to stick to an informal
arrangement or apply for a consumer credit licence.
Zopa claims that lenders will be able to get a higher rate
of interest on their money than through a savings account.
As for borrowers, the allure is that they may be able to secure
a loan at a lower rate of interest than is available on the
High Street.
How do I borrow money?
When you register your credit history is checked. Equifax,
the credit reference agency used by Zopa, allots you into
one of four categories, depending on your credit worthiness:
a,b,c or d. A is the most creditworthy while d is the least.
At present, only borrowers in credit categories a and b can
obtain a loan through Zopa. Roughly half the UK's population
falls into credit categories a and b.
People passing the credit worthiness test will be able to
scan the exchange for an appropriate loan. If they are in
credit category a the rate of interest on the loan should
be lower than if they are in category b.
There are restrictions on loan amounts - the minimum loan
is £2,000 and the maximum is £15,000.
How do I lend money?
People looking to become lenders will have their credit history
checked. This is to make sure that they are bona fide. The
lender then chooses how much they wish to lend and whether
they want the money to go to borrowers in credit category
a or b. The lender should get a higher rate of interest by
lending to people in group b than to those in group a.
This money is divided up between at least 50 borrowers. The
idea is to minimise risk to the lender. (minimum loan is £500
and the maximum £25,000) The maximum amount a lender
will lend to an individual borrower is set at £200.
Are
there any charges?
Yes, customers borrow at the interest rate that suits them,
based on their personal credit rating. In addition, they must
pay a one-off fee equivalent to 1% of the loan they take out.
Zopa will also make money through the sale of loan payment
protection insurance to borrowers.
Lenders do not have to pay a fee to use the exchange
What are the risks?
Non repayment of loan - the company manages the collection
of monthly repayments and if any of that money is not paid
on time, uses exactly the same recovery processes as the High
Street banks. Zopa will refer the debt to a collection agency.
The agency then pursues the borrower for payment and costs.
However, if the debt collection agency does not manage to
secure payment then the lender will have to take the loss
on the chin.
It is estimated that during the next two years 1% of borrowers
in the a credit category will default on their loan.
However, if in the future, people in credit categories c and
d were able to borrow, the loan default numbers would probably
rise.
What if Zopa goes bust?
The company says that in the event of business failure, the
loan agreements still stand because Zopa is not a party to
any loan contracts; it only provides the mechanism for agreeing
them.
However, lending money is always risky and an economic downturn
often leads to large numbers of people being unable to repay
their debts. If this were to happen, then lenders could find
it difficult to get their money back - even from people with
a good credit history.
Some comforting knowledge for lenders;
Benchmark Capital, which is putting up some of the money for
the venture, has, in the past, backed EBay and Betfair. And
Zopa's chief executive Richard Duvall is a co-founder of internet
bank Egg. Zopa has also been authorised by the Financial Services
Authority (FSA) and has a credit licence from the Office of
Fair Trading.
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