Loans – check your options

Have you heard of Zopa? Zopa stands for Zone of Possible Agreement and the aim of this internet company is to match small lenders and borrowers. Borrowers and lenders are put in touch with each other, thus excluding the traditional lenders who normally arrange the deals and saving money in the process.

Obviously growing in popularity, in just 18 months, Zopa have attracted over 88,000 members. Around two thirds of these are borrowers.

Lenders are happy with the arrangement because they have control over money lent and achieve a higher return rate than they would get with building societies and banks.

Borrowers benefit in that they are charged lower interest rates and the loan is flexible, in that there are no penalties of they wish to settle the debt earlier than the original term.  This could prove helpful to people with irregular income and the self employed, who struggle to get loans from banks, but are often able to repay loans early, as cash flow alters.

Zopa is responsible for carrying out full credit checks on all borrowers and they are rated as “A” or “B” borrowers, depending in the results of the check. The difference in rates paid between these two categories of borrowers is 1.3%. Zopa receives a fee of 0.5% from both borrowers and lenders.

The lenders and borrowers are required to sign up to a legally binding contract with each other and Zopa carries out the monthly collection of repayments which are made by direct debit.

It should be noted that Zopa is not a bank and is unable to offer loan protection in the way Banks and Building Societies can. It holds consumer credit licences, issued by the Office of Fair Trading and authorisation and regulation by the FSA (Financial Services Authority) but this is only with reference to the sale of payment protection insurance, which Zopa offers as an optional extra and for which they receive a commission.

Zopa is very proud of their bad-debt record, which is good in that it shows only 0.05% over the first 18 months. However, as someone with lots of experience in the market commented “Zopa has a low default rate because it only lends to people with very good credit histories and who earn at least £25,000. You can’t compare Zopa’s default rate with the banks’ because they have to lend to a far wider customer base.”

Typically, defaults occur halfway through a loan. As these loans have only been up and running for a maximum of 18 months, on maybe a five year loan, it is far too early to come to any conclusion.

If you have a really good credit record, then it appears that a loan through the Zopa system may be really good value. However, if you rate a “B” rating with Zopa then the rates are not as good and could, at present, be bettered by shopping around elsewhere.

If you have a poor credit history, it’s probably highly unlikely you’ll get very far with any application and you may very well end up with just another unnecessary footprint on your credit reference file.

For a full range of options on these smaller loans, and indeed any loan advice, then a visit to an internet broker’s site is to be recommended. They can offer you lots of advice and guide you to the right lender for your circumstances.

As always, do your comparisons and avoid costly mistakes.