With interest rates rising on personal loans in the aftermath of the credit crunch, social lending could become a cheaper way to borrow.
Have you become disillusioned with your bank? Or are you less than keen on financial services companies in general? The problem is, when we need to borrow they are usually our first port of call. And to make matters worse getting credit in this way is becoming increasingly costly which, unfortunately for borrowers, is just one of the many repercussions of the global credit crunch.
Social Lending
But what if you could get a loan without having to approach your nasty old bank at all?
There is an alternative which is the new concept of ‘social lending'. Social lending enables people to lend to and borrow from each other, while cutting the bank out of the loop completely.
Zopa -- which stands for ‘Zone Of Possible Agreement' -- is the company behind the launch of a new Listings Service which matches borrowers with lenders. Borrowers can pitch online for the loan they want while lenders bid against each other to provide that credit. Zopa labels the service as the ‘eBay of Money' and it's the first of its kind in the UK.
Each listing will include the size of the loan required, the repayment period and the target interest rate the borrower is hoping to pay. The borrower will also have the opportunity to give as much evidence as they wish to encourage lenders to bid. Meanwhile lenders submit how much of the loan they are willing to put up and the interest rate they want to receive in return.
Once the full loan amount has been achieved it will go ahead at the aggregate interest rate of all the offers made, as long as the borrower accepts it on that basis. Interestingly, while the listing is still open lenders can make bids at lower interest rates even if the loan is already fully covered. This competitive element will drive the final interest rate down for the benefit of the borrower.
Listings last for twelve days after which time they close. The offers that combine to make the lowest possible rate for a loan are successful. If there aren't enough offers to cover the total amount, the loan won't go ahead but borrowers have opportunity to try again through a new listing.
So what returns can you expect to achieve? According to Zopa some lenders are enjoying a return of more than 10% a year, while the average on all money lent so far is more than 7% (before tax, but after bad debts and the 0.50% fee - see below for charges). Meanwhile borrowers are being charged a typical APR between 6% and 7% (based on a loan of £3,000 repaid over 3 years) which competes well with the conventional personal loans market.
Risks and Costs
If this sounds like a great idea to you in theory, I'm sure you must be wondering how secure money lent in this way really is. Anyone wishing to make a pitch will be vetted by Zopa to ensure they are credit-worthy, prime market borrowers.
All potential borrowers are identity-checked, credit scored and risk-assessed. Credit scores are made available within each borrower's listing. Plus anyone lending £500 or more will have their money shared across at least 50 separate borrowers to spread the risk. Zopa state the default rate since launch is low at 0.09% but however negligible that may seem, the risk can't be ignored.
Not surprisingly the service doesn't come for free. Zopa charges lenders an annual fee of 0.50% on the amount they lend while borrowers are charged the same fee on the amount they borrow. There are no other charges and no early repayment fees.
Social lending is certainly an innovative idea. Remember when you open a savings account you are essentially lending to your bank. But if you don't need access to your money and you can get a better return, why not consider lending to other people instead? And if you need to borrow but don't like the look of what your bank has to offer, why not turn to your peers for help too?
More: How I Opened My Own Bank! | Visit lovemoney.com's Loans Centre