Zopa Personal Loan

Peer-to-peer lending: a replacement for banks?

Peer-to-peer lending currently accounts for a tiny fraction of the total loanbook, but this could begin to change as the number of available platforms multiplies.

With banks charging an average of 18% for borrowing through overdrafts or credit cards , it's no surprise that consumers are looking around for cheaper sources of finance. At the same time savers are earning a pathetic return, and in some cases are prepared to take more risk to improve income. Could peer-to-peer (P2P) lending be a mutually beneficial solution?

Possibly, but it has to be approached with caution as P2P lending is not regulated and there's no guarantee you'll get your money back. From the borrower’s point of view P2P could be a good source of finance for small projects or to carry a person over a difficult patch . But the interest rates may not be much lower than you would find at a commercial bank. The advantage is that personal lenders may consider a loan of only a few hundred pounds where a bank would not be interested.

P2P lending originated in the US, where it is an estimated to be worth $1 billion, with loan volume in 2012 expected to triple as banks continue to tighten their policies. Zopa is the highest profile P2P lender in the UK and has been around since 2005 .  

To reduce the risk to lenders Zopa checks potential borrowers’ credit files and puts them into risk categories. Lenders decide how much they want to lend, at what rate and to which category of risk.  

To keep risks manageable Zopa will only lend small amounts to individual borrowers – so this isn’t really a replacement for a bank loan. A lender offering £500 or more would have their money spread across at least 50 borrowers, who enter into legally binding contracts with their lenders. If repayments are missed, a collections agency uses the same recovery process as the high street banks. Zopa’s cut is a £130 transaction fee and a 1% annual servicing fee to lenders.

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