Social lending: Zopa launches two- and four-year loans

Social lender Zopa has expanded its range to include two- and four-year loans. How do they compare?

Zopa is the largest social lending community, having helped match around £200m since launch in the mid-noughties.And it's expanded its range to include two-and four-year loans, complementing the three-and five-year loans it already offered.

What's more borrowers taking out two-year deals through Zopa are typically enjoying even cheaper rates than three-year ones. This goes against the grain. High-street lenders don't want to encourage such short loans, so they tend to charge higher interest rates for them.

Zopa is already, for many borrowers, the cheapest place to get a loan. A two-year loan at £3,500 might cost borrowers a market-leading 9.3%, compared to a more typical 13% or more from high-street banks, building societies and supermarket banks.

A two-year loan at £5,000 costs 7.1% with Zopa, compared to 7.6% or above for those others.

Consider getting a longer deal and overpaying

Currently, Zopa's four-year deals seem to offer borrowers a slightly higher interest rate than its five-year deals, on average. This is normal for other lenders, but I suspect with Zopa this will reverse as the weeks or months go by.

However, for now, if you're looking for a four-year loan, you should also compare the five-year price you might get, because you can take advantage of Zopa's free overpayments.

Zopa's CEO, Giles Andrews, describes these overpayments as a “unique feature”, which is not true. All lenders now have to allow overpayments by law, and those overpayments should normally be without penalty. I'm not mad at Andrews for the mistake though. This change to the law appears to have been missed by everyone else as well.

That said, Zopa is possibly the only lender to offer overpayments with no complications. For other lenders, it is a bit of a rigmarole to follow the legal procedure in order to make them. You can read more on that in Overpay your loan without penalty. Hence, Zopa still remains a more convenient option.

The downside is you might be tempted to overspend. If you don't do budgeting, or you are often tempted to spend more than you planned, you should avoid this strategy. It's too dangerous.

Those aren't just words. I have probably put more time into researching debt issues than any other topic. It's clear that large numbers of us find the temptation to leave our debt outstanding for longer too irresistible, despite the much higher cost.

If you're struggling with debt issues, check out the Dealing with Debt blog from the CCCS, which is full of useful tips and guidance.

Ratesetter offers even more flexibility

This sort of flexibility isn't completely new. Ratesetter is probably the second biggest and second-most established social-lending website between individuals, although it's younger and about one-tenth the size of Zopa.

It allows loans over six months, nine months, 18 months, and one, two, three, four and five years. Interest rates for borrowers look to be pretty much the same as Zopa's, if perhaps just slightly more expensive.

How this affects savers

The effects on savers are not as significant as for borrowers. For savers – that is, individuals lending their money to borrowers on Zopa and Ratesetter – shorter deals can mean receiving larger repayments each month. Your money is released back to your account more quickly, but you'll need to reinvest this.

The biggest effect is indirect, in that the new Zopa loan ranges will attract more borrowers, and more attention to peer-to-peer lenders.

More on loans:

Compare the rates on personal and social loans

Tesco cuts loan rate to 6%

Amigo Loans and the dangers of being a guarantor

Sainsbury's launches price guarantee for loans

Overpay your loan without penalty

Three ways to get an interest-free loan