For the last few weeks, I've been looking into peer-to-peer lending.
One of the reasons is that banks, who for years have managed to make life difficult for those that want to borrow from them, have now done everything in their powers to hack off those that save with them. I want a good return on my money, but I don't want to have to keep moving it from bank to bank. Especially as now, there is a chance that banks may go bust. I don't think that the government would actually allow a bank to fail, but why should banks be any different to a company that employs a lot of people?
I also feel strongly that many jobs will go, because the banks will not lend to people, who need that money to keep businesses going. So perhaps by lending my money directly to those that need it, I can do my bit to help things to get straight.
Possibly the most respected web site of this type is
Zopa. The company was setup in March 2005 and calls itself a Social Lender. A lot information is given
here at
carpetbagging.co.uk.
Here's what they say about the history of peer-to-peer lending.
Zopa (zone of possible agreement) was the first social lending operation launching in the UK in March 2005 and since has launched in the USA and Italy and has plans to launch in Japan. They are backed by the likes of Bessemer Venture Partners, Balderton Capital and Wellington Partners.
This was followed by the launch of Prosper in the USA in 2006 who were also backed by venture capital and have since gone onto have over 810,000 members and over $175,000,000 in loans. The last figure I saw suggested there are now over 30 peer to peer set up around the globe with more launches planned.
The total value of loans made by Zopa UK's site up to 30/09/2008 was just under £26.5 million with bad debts and collections running at less than 0.5%.(of late typically about just under £250,000 a week is being lent out) The average lender has lent out £1251 and the average borrower has borrowed £4184. (most popular loan purpose car and area of UK with most borrowers Birmingham)
And this is how they see the future.
A recent report by Celent Communcation suggested peer lending would reach $1.6 billion this year and then double in 2009 and reach near $6 billion in 2010.
An example of this growth can be seen from Zopa UK as week ending 02/10/2007 £147,120 was lent out but a year later week ending 02/10/2008 £245,200 was lent out so up by over 66%.
But that is what others think. So how does
Zopa work?
Let's start with someone like me, who to get a reasonable return on money that normally, I would put on a long-term basis at a bank.
I signed up with
Zopa and transferred my money using a debit card to a holding account. There was nothing too onerous and the holding account pays a small amount of interest. They did do a simple credit check on me, but there wasn't much else. I suspect they'd do more, if I was borrowing!
Let's say I have £5,000 to lend.
I decide the markets I want to be in. These are determined by either 36 or 60 month contracts and by credit ratings of A*, A, B and C, with the addition of a Youth market for those under 27. You just make the money available, name the interest you want and decide the maximum amount of money you'll lend to an individual.
As I write, I'm lending money at 7.6% in the A* market, which after a
Zopa deduction of one percent and an allowance for bad debt means that I should get a return of 6.1%. Interestingly, this rate has not changed much over the last few weeks despite a cut in base rate of 1.5%. It just shows how useless the banks are in providing services to customers.
The question has to be asked is if
Zopa is risky.
One things that has to be said about
Zopa is that they are very open. So I can get pretty good statistics on things that matter as bad debt. I will not comment on the levels except to say that they appear to be below forecast.
Perhaps this is because there is an ethical dimension to
Zopa. Lenders may tend to have a social responsibility and borrowers will suspect this, so perhaps your
Zopa loan is the last thing you don't pay.
But what cuts down the risk with
Zopa, is how they do business. If someone wants to borrow say £1,000, I would not lend them all they need, but just up to my maximum. So money is lent out in small packets to many individuals, which statiticians will tell you is the best way to spread risk.
I have not borrowed any money from
Zopa, although there are individuals who have done both. But if you do borrow from the site, you will be charged a £100 arrangement fee.
So who should use
Zopa.
You must be Internet-savvy and I think it helps if you want to be hands-on with your investments.
Zopa is the complete opposite in this to something like an ISA, where you pay money in and hopefully get more back.
I sometimes think it's like Internet betting with a lot of the buzz, but without a lot of the risk.
Note that the links in this post, link to my referral page in
Zopa. If you should join then I get a small fee. My user name is VagueShot.
Labels: banking, techniques
