Lending: Savers and borrowers unite to beat the banks

Published on Thursday 29 July 2010 15:39

STARVED of decent savings rates and with rapidly diminishing access to affordable loans, can it be any surprise that savers and borrowers are increasingly looking to each other for the money deals they need?

With an average savings return of 8.2 per cent and loan rates significantly below the current average, peer-to-peer lending website Zopa stands out from the mainstream market.

The online lending exchange offers a way to bypass the banks by allowing lenders and borrowers to deal with each other directly. Lenders set the interest rate at which they want to lend, how much they lend, the return they want and the risk level of the typical person they want to lend to. The loan rates offered are frequently more competitive than those available on the high street as credit card rates rise and providers restrict access to their best deals.

The peer-to-peer lending site had more business last year than in its first four years combined and is set to repeat that feat this year, with an average of 4 million of loans every month. Zopa's popularity owes much to word of mouth and to growing antipathy towards the mainstream banks since the banking crisis unfolded. It has also benefited from being able to offer competitive loan rates at a time when the personal loan market is shrinking, and average returns of over 8 per cent during a period of rock bottom interest rates.

Its success has prompted others to follow suit. Among the newcomers is Yes-secure.com, which in method and appearance borrows heavily from Zopa and asks members to invite friends, family and colleagues to join their yes-secure lending and borrowing network. Borrowers are charged 80 while lenders will pay interest of 0.9 per cent of the amount lent. Zopa charges 1 per cent a year to lenders on the money they have loaned and a fixed charge of 124.50 on each loan for borrowers, which is reflected in the APR they are quoted.

But are these sites safe? Zopa, like most lenders, is picky when it comes to credit records. Anyone wanting a loan has their identify and credit record verified and borrowers with high levels of unsecured debt or poor histories of credit repayment are excluded. Consequently the risk posed to the lender is minimal - the site currently has a default rate of 0.7 per cent and lenders have limited exposure to individual debtors as their loan is spread across a pool of borrowers. For instance, loans of 500 or more are spread across at least 50 borrowers, so one default does not pose a threat to the lender.However, it is worth keeping in mind that Zopa is an online marketplace rather than a financial institution, so while it is regulated by the Office of Fair Trading and is recognised by the Finance and Leasing Association, it is not regulated by the Financial Services Authority and so users are not protected by the Financial Services Compensation Scheme.

So does Zopa really offer a genuine alternative to mainstream borrowers and lenders?

LOOKING FOR A LOAN

The personal loan market has been going backwards over the past year. Applicants without clean credit records are being squeezed out of the market and the cheapest rates are becoming more expensive, with virtually no competition in the market. The average rate for a 5,000 loan repaid over three years is now 12.6 per cent, according to Moneyfacts, the highest since 2001 when the Bank of England base was 6 per cent, the decade peak.

"None of the providers really wants to be lending at the moment," said Michelle Slade at Moneyfacts. "With unemployment high and more job losses likely to be on the way providers are increasingly wary of borrowers defaulting on their loans."

Like all mainstream lenders Zopa favours borrowers with clean credit records, so it's not necessarily an alternative for those rejected by the high street brands.

But for those who are accepted, the cost compares well. Zopa currently gives a typical rate of 9.3 per cent for a 5,000 loan repaid over three years, equating to monthly repayments of 158.88 a month.

The site can be useful alternative for the self-employed and others with fluctuating income who are frozen out of the mainstream. Nor are there any early repayment penalties, making it easier to repay the loan sooner.

SECURING INCOME

The collapse of the loans market has mirrored the devastation of savings income since the plunge in interest rates that reached the current 0.5 per cent in March 2009, an all-time low. Consequently the only savings products currently beating inflation require savers to put their money out of reach for at least three years, after the withdrawal last week of the index-linked savings certificates from NS&I.

The average savings account now pays just 1.3 per cent but lenders on Zopa saw average returns of 8.2 per cent in the year to the end of June.

Returns are dictated partly by the risk level chosen. Borrowers are grouped according to their credit level and how much they want, with those lending to the highest-risk borrowers getting the highest returns. For example, when you lend to the Y60 market you are lending to the youngest borrowers who are looking for 60 month loans, but the average return in this market is currently 11.4 per cent, reflecting the greater risk.

www.uk.zopa.com

CASE STUDY

ZOPA may be giving him stock market-beating returns but part of George Anderson's motive for using the social lending website is to help borrowers get a better deal.

Anderson, a software engineer who runs software and recycling businesses (including www.newlifelinen.co.uk), heard about the website through a fellow director. He invested 1,000 and reinvests each monthly interest payment.

"It has outperformed the equity market since I put it in 18 months ago, returning about 12 per cent a year."

Like many people new to Zopa, Anderson, of Edinburgh, had some initial misgivings regarding the security of the service, but those were allayed by the depth of the underwriting detail provided on the site.

"You can't lose your initial capital so I wasn't concerned. But my main motive for using Zopa is to help borrowers."

Having struggled to secure a loan when running a previous business a decade ago, Anderson is all too familiar with the difficulty of getting affordable finance without a squeaky clean credit record.

"I know a lot of people can't borrow because of credit checks so through Zopa I can help people outside the system get a sensible rate."

Some 60 per cent of Anderson's investment goes to borrowers in Zopa's highest risk category, typically those under 26 wanting five years loans.

"I would encourage anyone with cash they want to keep safe to put it in Zopa," said Anderson. "You get a better return than from giving it to the man and it's a good place to borrow because it won't lend what you can't afford to pay back."