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Can you beat the banks?

Posted on 18 Jun 2009 at 16:31

Lenders are given the choice of which market they want to invest in and the rate of return they expect. Someone may be happy to loan £500 to the B market at a rate of 9%, for example, while another may want to lend the same amount at 10%. Interest rates in the lower-grade markets are generally higher to reflect the increased risk.

To further spread the risk of someone running off with your money, lenders' funds are spread across at least 50 borrowers behind the scenes, in a similar fashion to how files are downloaded from multiple sources on services such as BitTorrent. "So, someone lending out £500 will lend 50 lots of £10 to individual borrowers," explained Andrews.

If a potential borrower is lucky, enough to pass the scorecard test they're invited to accept a loan offer. This is determined by a weighted average of the cheapest offers made by all the lenders who are happy to lend to the borrower's allocated market.

If a borrower accepts the loan, funds are taken off the market and Zopa conducts more comprehensive underwriting checks. These aren't automated, and require human intervention and phone calls. "More than half the people who go on to accept a quote for a loan are rejected by our underwriters," Andrews said, without offering specific numbers.

Person-to-person borrowing

If Zopa Markets sounds a little clinical there's another, more human, element to Zopa called Listings. This is a "peer-to-peer" lending model that throws a lifeline to the borrowers who may have been rejected from the Markets. Individual borrowers set up a page similar to an eBay listing - this advertises who they are and what they need money for. Lenders who opt for the Zopa Listings route can choose how much they wish to lend to a particular borrower, and at what rate - they're competing with other lenders, so the more lenders who get involved, the lower the rate becomes.

Campn321 has had a wake-up call: lose weight or risk having another stroke. She's after £6,950 for a gastric banding operation.

The type of person who borrows money using Zopa Listings varies. Gareth1989 is a 20-year-old full-time employee who wants money to put a deposit on his first car. KatieJones1 is a "full-time nurse looking to consolidate existing debts into a much more manageable monthly payment". And campn321 has had a wake-up call: lose weight or risk having another stroke. She's after £6,950 for a gastric banding operation. All of these borrowers received offers for the full amount of their loans, and accepted them.

Listings applicants aren't as thoroughly screened as those who borrow via the Markets model and, while they must all pass the initial credit rating scorecard, Zopa doesn't conduct an extra underwriting process. "It's potentially higher risk and lenders are making their own decision based on what the applicant is telling them," Andrews pointed out.

However, Zopa does seek to verify certain information provided by applicants in their listings. "If the applicant says, 'I don't have any unsecured debt,' and we know they've got four credit cards, then we'd reject the listing. But what we don't do is make a judgement call on whether we think that person can afford the loan."

Andrews admitted that the bad debt on Zopa Listings, as opposed to the Markets, is "reasonably high... some lenders won't touch it because they think it's high risk, and other lenders think it's great fun".

So why would a borrower want to use Zopa? Lisa H, aged 52, used the Zopa markets to borrow £1,000 for a spur-of-the-moment purchase: a Vespa scooter. "I liked the idea of individuals getting my money, not banks," she said cheerfully. "To me, it seemed like a very British idea. Now, when I go buzzing around on my scooter, I think of how 100 people each invested £10 on me."