What if you could borrow money from other ordinary people instead of your local bank or lend money to others that needed it? In return, you'd get a better rate on your loan or a better rate on your investment than you could get from any bank. That is exactly what a new website in the United Kingdom is doing -
zopa.com - cutting banks completely out of the money lending equation.
For people that have money to lend, they sign-up at the site and indicate the amount money they are prepared to lend to other people and for what period of time. The borrowers are divided into 2 groups: Market A for people with good credit, and Market B for borrowers with a lower credit rating. You can choose a lower rate of return by lending to borrowers who have a very high likelihood of paying all the money back (Market A borrowers) or a higher rate of return for lending to people with credit ratings that have a higher risk of default (Market B borrowers).
To lessen the risk to those lending money, there is no one on one lending. Zopa spreads each user's cash among a minimum of 50 different borrowers. This means that if there is a default, the lender doesn't lose all the invested money, but a fraction. All the lenders and borrowers enter into a legally binding contract with their respective borrowers and lenders while Zopa manages the collection of monthly repayments. If any of the money is not paid on time, Zopa would go through a collection process similar to how a regular bank would try to recover a defaulted loan.
The payoff for the lenders is that they would get a better return than offered by the best money-market accounts. Currently Market A lenders can expect returns around 6 percent, while Market B lenders receive rates of return as high as 9 percent. The payoff for borrowers is they get access to money at lower rates than they would likely be able to obtain from any bank.
For lenders, the site is completely free. Borrowers pay a 1% commission on the loans they take out to Zopa and it is how the site makes its money.
The service is currently only available to U.K. residents over 18 who clear a credit check. Over 20,000 people have signed up with the service since March. While US federal and state regulations may cause some problems for a similar enterprise in the US, the site's owners are looking at ways to break into the US market with a similar business plan.
Zopa.com - Person To Person Banking Loans
