Toolbox: Zopa - better returns, cheaper credit?

Today's post is about www.zopa.com . Its a new idea which can cause serious issues for banking industry. Zopa has potential to bring cheaper capital and better interest rates to all of us. Currently its getting a fair share of media coverage and is growing fast. "The Guardian" named it one of the top 10 British dot coms to watch (link).

How does it work?

Zopa acts as a platform for lenders and borrowers. It allows users to bypass banking system and thus save on interest or get better returns. At the same time it claims to offer high street bank security levels.

Zopa members offer to lend money at selected level of risk and desired interest rate. The level of risk depends on borrowers credit rating. As expected the higher the risk the greater the return. Zopa borrowers specify amount and maximum acceptable interest rate. After putting an offer to either lend or borrow the system will wait until the match is found. Depending on how attractive the rate is, Zopa member may lend/borrow really fast, wait for some time or not finalize the transaction at all. When lending/borrowing Zopa provides user with guidance on how to optimize the rate and finalize transaction quickly.

Zopa.com. Shows lender how likely is it to achieve the desired interest rate.

Zopa.com showing how interest rate depends on credit rating and loan term

There are two important questions about Zopa. The answers will determine whether its a hit or a flop:

Is it safe?

Theoretically it should be as safe as putting money into a bank account. Zopa performs credit checks on borrowers using one or more of the UK’s credit bureaux (e.g. Equifax, Call Credit, Experian). Zopa will not allow borrowers with poor credit history. If user is lending more than 500£, the money will be spread over more than 50 people. Additionally members are choosing the level of risk yourself by selecting the credit rating of people they wish to borrow to.

Is it cheaper?

According to data on Zopa site it indeed is. Borrowing rates could be as much as 2% lower than in a high street bank. Interest earned can be 2-3% higher than on your saving account.