The world's first borrowing and lending exchange is a fantasically ethical system that could save you money.
Yesterday I saw two things on t'interweb that astounded me. Firstly, David Hasselhoff has been crowned the King of the Internet, which is brilliant news for anyone with a Foolish sense-of-humour (although I pity The Fool who didn't vote for Mr. T instead!). The other thing is that Zopa are advertising loans at 4.9% per year (APR) and a low-risk gross return to investors averaging 7% per year. This is excellent news for savers, borrowers and investors, regardless of your sense-of-humour.
Zopa is the world's first ever lending and borrowing exchange. Individuals can borrow from, or lend to, other people. It's a fantastically ethical system which provides relatively safe returns to investors and stops lenders making excessive profits from borrowers.
Borrowing through Zopa
As I said, Zopa's advertising a rate of 4.9%, which is on a loan of £5,000 over three years. However, I got an online quote (it takes about three seconds) using the same loan amount and period, and I was quoted a much poorer rate of 6.3%. However, later in the day the rate was 5.5%. The reason for this is that Zopa is still relatively new, so rates vary a lot whilst they build up a panel of lenders.
Here's how regular lenders compare on a £5,000 loan over three years:
Lender | Typical APR | Monthly repayment | Total repayment |
|---|---|---|---|
5.6% | £150.89 | £5,432 | |
Direct Line | 5.6% | £150.89 | £5,432 |
Northern Rock | 5.7% | £151.11 | £5,440 |
GE Money | 5.7% | £152.50 | £5,490 |
5.8% | £151.32 | £5,448 | |
5.8% | £151.32 | £5,448 |
From these figures, if you get a Zopa loan for 6.3% it won't be market topping, but 5.5% or less and you've probably got yourself a good deal. Zopa offer their loans to the top two groups of borrower, who they call 'A' and 'B'.
Lending through Zopa
For lenders, Zopa claim the average return so far has been 6.75% before tax and after predicted bad debt. You can lend as little as £10 and, possibly from as early as next week, you'll be able to lend as much as you want (the limit currently is £25,000). If you lend £500 it's spread across at least 50 people.
Compare their rates with savings accounts:
Provider | Rate (AER) | Minimum investment | Maximum investment | Notice period |
|---|---|---|---|---|
Zopa | 6.75%(APR, not AER) | £10 | £25,000 (although Zopa tell | Min six month investment period |
5.15% | £1 | N/A | Instant | |
Birmingham Midshires | 4.95% | £1 | £5m | Instant |
B&B eSavings | 4.85% | £1,000 | £2m | Instant |
Anglo Irish Bank Easy Access Desposit Account | 4.80% | £500 | £100,000 | Instant |
Chelsea BS Rainy Day Savings | 4.80% | £500 | £100,000 | Instant |
4.75% | £1 | £500,000 | Instant |
So Zopa tops the table, and whilst your money is sitting in the Zopa account and not being lent out, it still earns a respectable 3.25% interest. However, the advantages of these savings accounts over Zopa are that you can access your money instantly, and you don't have to wait for borrowers to come along in order to get a decent return.
Zopa is new and the rates are volatile for borrowers. What's more, it's not quite smooth yet for lenders either. Still it gets my vote as an excellent way to diversify your portfolio. If you want to wait a bit and see how it does, there are always the great savings accounts and some of the cheapest personal loans ever!