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Can you beat the banks?

Posted on 18 Jun 2009 at 16:31

Zopa is no Barclays. It operates out of a modest office in central London's Mortimer Street, and is yet to turn a profit. In recent months, however, the credit crunch and anti-bank sentiment has caused its popularity to increase exponentially. "We're getting quite close to profitability," Andrews claimed.

This type of peer-to-peer lending is bigger in the US and has received mixed results. The social lending site Prosper (www.prosper.com) employs a peer-to-peer-only model and has suffered from relatively high levels of bad debt, most likely because it doesn't undertake as many background checks. It's now in a "quiet period" while the US Securities and Exchange Commission (SEC) investigates its status. By contrast, rival Lending Club (www.lendingclub.com) has registered with the SEC and has just secured $12 million in venture capital funding.

Emergency loans

Zopa might be the first destination for borrowers seeking long-term loans, but where do you turn when your boiler is broken and you don't have the funds to fix it? Despite a long-running media backlash, bank overdraft charges still veer towards the ridiculous. Enter Wonga, a short-term loan service that approves and issues loans of up to £200 entirely online (or up to £750 for second-time borrowers), and deposits the funds in your account within minutes.

The site's homepage has two sliders: one for how much cash you want, and the other for how long you want it. The amount you pay back Wonga, including fees, is clearly displayed underneath. Its typical APR of 2.689% may sound worse than the ugliest of loan sharks, but it only loans out money for only up to 30 days, not years. So, a £150 loan over ten days would cost £170.84.

Wonga launched in October 2007 and is already turning a profit, according to founder and chief executive officer, Errol Damelin. "We concentrate a lot on transparency," Damelin said. "We felt the incumbent services across consumer finance in general just weren't transparent enough. People didn't know up front what the costs were going to look like. We never want to lend to anybody who doesn't fully appreciate how much it's going to cost them and when they are going to pay it back."

Damelin said it chooses who it lends to carefully, and the vast majority of applicants are rejected. Typically, Wonga's borrowers are people who run into "occasional cashflow problems", rather than long-term debt.

Damelin wouldn't reveal how Wonga arrives at its "automatic" lending decisions, revealing only that during credit checks, it "uses data that is publicly available, but we do tonnes of analysis of the data to make it relevant in ways other people haven't figured out how to do". But the lack of human interaction surely means the company is a little impersonal? There's no-one there to make a judgement on whether they think you're able to pay off the loan - only a computer with the power to say "no", just like the Little Britain sketch.

The automation works in the borrower's favour, Damelin claimed. "We're using objective data points. We're not tempted to see people in a different light. We think that's the right way to make decisions. It requires a significant degree of boldness.

"We only lend to people who we know will genuinely be able to pay us back... which sounds obvious, but it's not because credit-card companies and banks make money when you don't pay."