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Zopa lets real people like me and you lend or borrow money from each other.  It really is the ebay for money. Rather than exchanging nik naks we’re lending each other money.  What a great idea.

Zopa allows people to skip the big nasty bank and instead deal with individuals.  Depending on you’re financial situation you’ll either be a borrower or a lender, so how does it work?

Borrowing

When signing up on Zopa you will be given a Grade A*, A, B or C.  The grade you’re awarded depends on your Credit Score and the higher the grade the better interest rate you’ll be able to get.  Zopa doesn’t cater for high risk loans so if you don’t qualify for at least a C then Zopa isn’t for you.  (One of the requirements is that you earn £25,000+ per year).

Once you have your grade its time to get shopping for your loan.  Depending on how much you want to borrow, for how long and at what interest rate.  Zopa are very confident that their rates are better than any of the high street banks so you’re bound to get a good deal.  You can also pay your loan back early if you want at no extra charge which is encouraging.

By getting your loan here you should be able to save yourself some money and the interest you do pay will go to a few indivuals rather than a large organisation.

Lending

If you have a spare £5,000 burning a hole in your pocket then this could be the place for you.  You can login to Zopa and decide how much to lend, for how long and at what rate – you can even choose what grade of borrower (A*-C) you want the money to go to.  The lower down the grades you go the higher the interest rate you can demand.  Remember though, the worse the grade the more likely they are to miss payments delaying you getting your money back.  Borrowers not paying was my first major concern about all this but Zopa assure us they use the same debt collection agencies as the banks so there shouldn’t be a problem.

As investments go Zopa could be a real attraction.  The borrowers are checked out so there will be no high risk people taking your money meaning you should be able to rely on a 5-13% interest rate on your money.  That’s not to be sniffed at.  It’s not going to make anyone a millionaire over night but for the shrewd investor wanting to make their money work for them rather than rotting in an ISA this could be an option. 

So what’s in it for them?

Shock horror they aren’t doing all this out of the kindness of their hearts.  They take a 0.5% fee of the loan from the borrower and a 0.5% fee from the lender each year.  In real terms their 0.5% equals:

• A borrower taking out a loan of £2,000 would be charged 0.5%, which equals a £10 fee. This is added to the loan amount, bringing the total borrowed up to £2,010.
• A lender lending £1,000 at 7% would earn £70 of interest each year if the money is always lent out and paid back. They would pay a fee of 0.5%, or £5, in total.

Seeing the 0.5% like this should show you that the deal isn’t hampered too much from their cut. 

That’s because they’ll be making most of their money from Payment Protection Plans (PPP).  I’ve got to be honest - I hate these things and think they’re a rip off.  If you’re very cautious and want to double the amout of interest you pay back on a loan then go ahead, but it’s not for me.

Overall I love the concept Zopa have brought to the table.  Cutting out the middle man and allowing people to literally share the wealth (for a fee) is a nice idea.  After all, people have lent money to friends and family for centuries.  The difference here is that it isn’t just your friends and family; its everyone.  Plus there’s no emotional black mail when they can’t pay one month, Zopa is a legally binding loan just like a normal bank loan so you’re much more likely to get your money back off these guys than uncle Bob who you suspect spends too much time down the bookies.

Behind the scenes Zopas CEO is James Alexander the ex Strategy Director of Egg.  They also have a number of large Venture Capitalists backing them so these guys mean business.

If you’re someone who is looking to make/save some money then I’d strongly suggest you add Zopa to your list of options when shopping around for loans or investments.  The success of this site will depend on it’s popularity so both lenders and borrowers have a wide selection of offers.  From what I’ve seen so far they’re well on their way.

The big question is what will the high street banks think about all this and what will they do about it?  Will they cut their interest rates to match Zopa?  Another option is for one of the banks to have the best of both worlds and to buy out Zopa altogether to cream off the profits from this venture for themselves.  The big advantage the high street banks have is the trust they have from the person on the street.  People have never heard of Zopa so it will take time to gain this level of trust and that isn’t easy.  If, or when, they become a threat, it will be an interesting stand off – $2.6 billion for YouTube, I can’t hazard guess at the price of this one.

(PS I’m hoping, no praying, the numerous links with Egg in the Zopa office is due to people moving together rather than Egg actually being behind all this.  It all just seems a bit too well organised for the usual start-up company, hmmm.)