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.
Lenders = Savers
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.
Selecting a Market
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.
Finding a Borrower
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.
What Are The Restrictions?
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…
Can I Get My Money Back Sooner?
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.
How Much Are The Fees?
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.
What Are The Risks Of Lending?
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.
How Do I Borrow Money From Zopa?
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;
- To be at least 20 years old
- A good credit history
- 3 years of address history in the UK
- To have been on the electoral role for all of your addresses during this period
- Enough income to ensure the loan repayments will be affordable
- To not have recently increased your borrowing
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.
Applying for a Loan
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.
How Flexible Are Zopa Loans?
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.
What I Default On A Loan?
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.
]]>Living on benefits is never easy. Planning your life around the schedule of your benefit payments is inconvenient at the best of the times. Often it’s completely impossible.
It’s a fact of life that, inevitably, we all meet with unexpected expenses from time to time. If this happens in-between your benefit payments things can get a little too close for comfort.
One of the most effective ways to fashion yourself some breathing room is by taking out a short term loan. However, there are a number of things to consider first.
Interest Rates
You will find it practically impossible, especially in today’s financial climate, to get a loan from a major bank. If you are considering getting a loan whilst on benefits then, unfortunately, you will have forget about the interest rates you have seen advertised on the high street.
The lenders you are more likely to secure a loan from operate in what is known as the “sub-prime” market. Whilst you may be used to hearing of interest rates between around 10%-20%, the typical APR on a loan form a sub-prime lender will be somewhere from 500%-4,000%. Some are in the tens of thousands.
For this reason it is best to borrow on small amounts for very small periods of time, otherwise the amount owed will rise rapidly and you may risk defaulting your repayments. This will impact on your credit rating.
Loan Amounts and Guarantors
If you are unemployed the absolute largest amount you are likely to secure a loan for is £3,000, however, only very few lenders offer this much to people who are on social security. Their interest rates are very high and their collection policies are inflexible, meaning if you are unable to keep up with repayments, which realistically, considering the APR, is likely, you’ll be facing all sorts of trouble. Event then, these lenders will only lend an amount such as £3,000 if you have a guarantor.
A guarantor is somebody who is willing to make your repayments for you should you fail to do so. It can be anybody but it is normally a close friend or family member. Being a guarantor is a big commitment as they are making themselves legally liable to pay off the loan if you can’t and as such guarantor loans need to be thought about carefully.
Furthermore, they will need to have a job with a decent income and a good credit history, as they will be credit checked by the lender. This means they can’t have received a CCJ or defaulted a payment in the last six years, or be on an IVA or be bankrupt.
If you are lucky enough to have someone willing to stand as a guarantor for you, it’s worth figuring out between you if it would not be wiser for the guarantor to get a loan in their name and then lend to you as a friend. This is also a big commitment but may ultimately be cheaper and there are typically more lenders for people with good credit then there are guarantor loan lenders.
For one thing, with their good credit history and income, they should be able to go to a high street lender and get a loan with a considerably lower APR. Secondly, high street lenders can be easier to negotiate with if you run into any troubles and so will your friend/relative.
If you don’t have a guarantor, which most people don’t, you’ll find it hard to get more than £1,000.
Credit Checks and Credit History
Your credit history is also going to be a factor. If you receive a County Court Judgement (a court order to pay an outstanding bill or debt) or receive a default notice (a letter from a company which comes after a final warning to tell you that you’ve defaulted, or failed, to pay outstanding monies) both of these will stay on your credit history for up to six years, limiting the amount you can borrow and the types of lender you can approach.
There are a number of websites that you can go to in order to find out exactly what your credit score is and what is on your credit history. You normally have to pay for this service, however, it is worth doing. Many people who have received default notices don’t know about it, often losing the actual notice itself amongst other bills and documents.
Some short term lenders may not credit check you at all, but be honest with yourself. Will you actually make repayments on time? If not, don’t get the loan. These same short term loans are generally loaded with lots of extra fees and charges for failed and late payments. This is on top of the interest so be sure you can pay on time.
Secured Loans
A secured loan is where you, the borrower, have to provide collateral to the lender as a kind of deposit for the loan. One particularly common form of secured loan offered to people on benefits or with poor credit are loans secured against cars. This is good news if you have a car or some other form of capital, as it opens up the option of secured loans to you.
However, if you fail to keep up repayments you will lose your car. Losing capital is the last thing you need when you’re already in a tight spot, therefore you have to asses the risk you are taking very carefully.
In other instances you may be asked by a lender to pawn some of your possessions in order to get access to a loan. This is similar but less risky as you know where you stand and, generally, the possessions will be worth less than a car. Again the interest rates are very high, so there’s no point sacrificing your possessions if you can’t afford the repayments anyway. You’d be better of selling them for cash. The amount raised would be smaller but at least you’d avoid accruing interest or harming your credit rating.