With people looking for new ways to access credit and invest their spare capital, peer to peer lending has taken off in recent years. Here we review the services of the industry’s biggest name, Zopa, with a run down of what’s on offer for lenders and borrowers alike.
With interest rates so incredibly low many savers are looking to move away from the traditional, risk-free investments such as savings accounts and are instead looking at novel ways of getting a better return on their money.
Peer-to-peer lending has proven to be a highly popular way of doing just that. Zopa is the biggest lender operating in the sector and to date has lent out more than £300,000,000 – money invested by savers lured by the prospect attractive returns.
Whereas 2% APR is considered competitive on the highstreet, Zopa can offer up 8.1%. So how do you go about using the service and gaining access to these extremely favourable rates?
The first choice you have to make is which of Zopa’s markets of borrowers you’d like to lend to as this will determine the rate you receive.
When borrowers want to obtain a loan through Zopa they are subjected to identity checks, credit checks and a vigorous risk assessment. Based on this, borrowers are given a rating of either B, A or A* (A* being the best).
Zopa the use these ratings, along with the length of time they need the money for, to group borrowers into six different ‘markets’ each of which come with a different typical rate of interest. Here’s a look at the typical rates currently being offered and accepted across the different markets.
| Market | Typical Interest Rate |
|---|---|
| A* Long Term | 5.12% |
| A* Short Term | 6.25% |
| A Long Term | 5.93% |
| A Long Term | 6.42% |
| B Short Term | 7.32% |
| B Long Term | 8.14% |
(Short term applies to any loan with a term of less than 3 years. Those between 4-5 years are counted as long term.)
You do not have to loan you money in one market exclusively, but can make it available in a variety of markets, effectively diversifying your investment and thus spreading your risks.
To lend you simply offer up the money you want to make available at whatever rate that you deem fair. Needless to say, the lower your rate is compared with the average, the easier you’ll find it to get your money lent out, the higher you go, the harder it’ll be.
This is because Zopa always offers borrowers money available to them at the best rates first in order to ensure their loans are more affordable than those available elsewhere. Remember that you only start to earn a return once Zopa have found borrowers for your money.
Once you’ve chosen the terms you’re happy to lend on, you simply set up and transfer money into a Zopa account. Zopa will then set about distributing your money among borrowers who match your criteria.
It’s important to understand that your money is not lent simply to an individual, but is dispersed across a wide range of people looking to borrow on the same terms. This is arranged so that (except for when you’re lending larger amounts) no single person will ever be lent more than £10 of your money, helping to reduce the risks of bad debt.
Lacking a huge pile of spare cash to invest won’t exclude you from being able to make a return from a Zopa. The minimum you need to set up an account is £10 and there is no cap on what you can lend so long as you are a UK resident of at least 18.
How long your money is tied up for depends on whether you lend to a shorter or longer term market as explained above. It’s worth carefully considering the term of the loan when planning your investment strategy, as it’s not advisable to put money in if you’re likely to need it back again imminently.
That said, unlike products such as high interest bonds, you do not have to wait until the end of the term to get your profits. As your loan is repaid in regular instalments, you’ll see part of your money coming back to you each month. You can either withdraw this to keep, or you can ‘recycle’ it using Zopa’s Auto Top Up feature, which will automatically offer the money you’ve earned back to the markets on terms pre-set by you. This effectively allows you to earn interest on the interest you’ve already earned (which is paid monthly) giving it further edge other forms of investments.
If you do find you need your money back quickly you may be able to release your cash by selling the loan off to another lender…
If you want to get your money back before it’s due, Zopa can find another lender to take over the loan (assuming there are others out there willing to lend on the same terms you’d previously arranged.) You’ll be charged a 1% fee for this, so you’ll be losing out on more than just the future interest payments.
You will not be able to sell on the loan if the borrower has ever missed a repayment, which adds to the risk of having to deal with any potential bad debts. It’s also not possible to transfer a loan whilst a repayment is pending.
Aside from the admin fee you’d need to pay to use the Rapid Release feature there also regular charges for using the site. You’ll be charged an equivalent of 1% per annum on the money you lend out, which is taken from your account on a monthly basis. This fee is the same not matter what rate you yourself are charging, so bear that in mind when planning your returns.
You only pay this fee on money that’s being lent, and it won’t apply to any portion of a loan that is defaulted on or repaid early. This ensures it comes out of your profits not your capital.
Zopa take a wide number of precautions to safeguard your investment. Firstly as mentioned above, they are rigorous in screening those applying for a loan and reject the vast majority of candidates, leaving only those you they are confident of being able to make repayments in their markets.
As a result of these precautions, at 0.5% Zopa’s A* market actually has a far lower default rate than most high street banks. Zopa can provide you with the current default rates in all of their markets before you invest. You can take this into account when planning your return.
Furthermore, as mentioned above, your money is lent out to multiple borrowers to spread risks. If you’re lending less than £2,000, Zopa will arrange it so that no one individual has more than £10 of your money. If you’re lending more than this it may be necessary to lend individuals more than £10 each to get the money out there, however, Zopa will still ensure it’s split at least 200 ways.
If a borrower does default further procedures are in place to ensure your money can be recovered and you will not to make any of your own efforts in this regard. Zopa will chase a timely repay on your behalf and, if it turns out their will be difficulties in continuing with the loan agreement, the loan will be purchased from you, including all interest due, by Zopa’s partner debt collection agency, P2PS.
In addition, until the moment your money is lent out form your Zopa account it is kept in a ring fenced RBS account separate from the company’s own funds. This means the fortunes of Zopa will have no bearing on whether you can reclaim the money from your Zopa account. (You do not need to worry about the fate of RBS either as, being a bank, the money in their care is protected by the FSCS guarantee.)
Though not regulated by the FCA, Zopa is licensed by the OFT.
As well as offering higher rates to savers, Zopa are also able to offer lower rates to borrowers than are available elsewhere. Loans can be obtained any amount between £1,000 and £15,000 for a term of 1 to 5 years.
To borrow using Zopa you will need;
If you have a lot of unsecured debts, of if you’re using a high ratio of all the credit already available to you, you will likely be rejected. Likewise, if you have issues with your credit file such as CCJS, defaults or a discharge from bankruptcy or an IVA you will also fail to pass the screening process.
Before applying it’s a good idea to look at Zopa’s market places and see what sorts of rates are available for loans of a similar size and length to the one you’re hoping to get. As rates are decided by the lenders offering the money they are constantly changing, but Zopa will always match you to the lenders offering the lowest rates. This encourages lenders to be as competitive as possible. (You can check what rates are available using Zopa’s loan calculator.)
When you start the application process Zopa will conduct what is known as a ‘quotation search’. This does not leave a ‘footprint’ on your credit file and is only visible to Zopa and the credit bureau who conduct it. On the basis of this quotation search Zopa will place you into one their three markets.
Those with the best scores will go into the A* market. Below that there’s the A market and finally the B market. (Bear in mind that borrowers in the B market still have a considerably better credit score than the majority of the general public.)
The rate you get will depend on which market you’re placed in (assuming you are able to borrow), with A* rates generally being closer to the 5% mark and B generally closer to 7% or 8%.
Once you’ve been told which market you would be placed in you can decide whether or not you want to make a full application. It is only at this point the you will be put through a full credit search.
Once you’ve applied, the Zopa team will take 24 hours to look over your credentials. Keep your phone on you and check your emails as they may need to contact you to ask for more information.
Once a decision has been reached, you’ll be informed by post. If the loan is approved, it’ll be transferred to you within 3 days, however, you can opt to have it fast tracked on the same day of next morning for a fee of £57.50.
If you do secure a loan you will be charged a borrowing fee but this in included in the APR quoted to you, and so is covered in your repayments.
If you change your mind you can cancel the loan before it is paid out. Once it has been sent out, if you wish to cancel the loan, you have 14 days to cancel the loan, give back the money, plus the interest that has accrued (this is calculated daily). You do not have to pay the borrowers fee. If you do cancel but fail to pay back the loan during these 14 days, the loan agreement stands.
Who can choose your own monthly repayment date so as to suit your financial situation and, unlike many other loan providers, Zopa do not prohibit you from finishing your repayments before the term. This means, if you are borrowing an amount you can easily afford, you can save even more by cutting the loan short and avoiding months or even years worth of interest charges. There’s no fee for doing this and you can make a one off lump sum payment whenever you like, just so long as you don’t have another payment still in processing.
Though the biggest loan you can acquire is £15,000, you are able to take out multiple loans on different terms, provided that you don’t exceed a total of £15,000.
If you do find yourself struggling to make repayments on time you should contact Zopa straightaway to discuss your options. If you default, your debts will be handed over to a separate collections agency.
This agency will charge you a fee of 22.5% of the overdue amounts it has had to collect. This goes up to 40% when the agency has to use a field agent. You will also have to pay interest on the overdue sum.
]]>When determining the actual cost of payday loans, it is worth noting that it is quite misleading to use APR within the range of actual cost comparison of payday loans with traditional and other forms of short term loans. We have to remember that payday loans are unique as such bridge financing are made for a shorter period of time compared to the other types of loans. And while APRs of payday loans are well within the 3-digit range, these ‘sky-high’ rates have limited bearing on the actual cost of the payday loans.
The principle behind this process can be compared to a hypothetical example where a taxi quotes a price of £15,000 for every 1,000 miles travelled or a hefty sum of £50,000 for a ton of tuna. Of course, we are well aware that no sane person will actually choose to travel a distance of 1,000 miles in a taxi or buy that many tuna. Taxis are specifically intended for short distance travelling and you will only buy a few pounds of tuna. In the same breath, you only use payday loans to address short term cash flow problems and this would normally last for a month.
It is also important to point out the fact that banks and other lending entities compete for a bigger share of the market and offer premium rates to get ahead of competition. In addition to this, we must remember that payday loans are relatively more expensive than traditional loans but can actually be the cheaper alternative in absolute terms.
A short term perspective is especially important should you be out of work and looking for loans on benefits because your income is restricted and you don’t want to get any late payment penalties which may send you repayments spiralling upward.
The fees levied on payday loans are used to cover the cost associated with the processing and verification of loan applications, capital cost and overhead expense. The key difference is that such cost is spread over a larger business portfolio for companies that specialise in larger loan packages, while payday lending companies draw such operating funds from their margin on loans with smaller amounts. This explains why banks and other entities that provide traditional loans charge lower annual interest than a number of payday lending companies.
Payday lending companies also have greater risk than banks and other companies that specialise in traditional loans. In most cases, short term loans have higher default rates and this means an escalation in the risk premium of such loans, which ultimately increases the cost of such loans. Thus, we have a situation where the interest rates of payday loans and such other types of short term loans are inevitably higher. Providers of short term loans are forced to find a way to recoup their investment and maintain a fair margin for the service they provide to remain viable.
Because of its expensive nature, payday loans and other forms of short term loans should never be tapped as a main financial option. It is a short term cash solution and the decision on whether one gets a payday loan or not should be made by weighing the flexibility of having a reliable source of instant cash against the cost of such loan. You must always decide on the cost or foregone benefits that you may incur in the event you decide against getting a payday loan for a short period of time.
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