Zopa Loans UK Review - A beginners guide to Zopa

Zopa is an abbreviation of "Zone of potential agreement", but is essentially an online marketplace where borrowers and lenders are brought together with a view to satisfying each others financial requirements.

Zopa was launched in March 2005 by the team who set up Egg banking and is backed by the same firm who backed ebay and betfair.

We have seen Zopa referred to as Zopa bank, but it is definately not a bank but does offer zopa personal loans at competitive rates

Again, on a similar note to that mentioned above it is the potential zopa rate of borrowing that can be most advantageous. There is also more flexibility with a Zopa loan than with a bank, as you can pay your debt off early without any zopa early repayment additional fees, and set the payment date of your choice.

In a time where banks and building societies and especially credit card companies are increasing their loan rates (despite the lowest BOE base rate in over 300 years!) Zopa is proving an exceptionally attractive alternative. A* borrowers can obtain rates of less than 7% (depends on the funding market at the time) and even B and C borrowers can slash the rates they are being asked to pay by some credit card companies. As an example, I have lent money at what I thought was a cracking rate of 15% to a borrower, who was in turn delighted with such a rate as they were currently paying an (unnamed Co) 39.9% interest! Yes that’s 39.9% interest.

Zopa charge an arrangement fee of £118.50 for every loan they create, (zopa loans can be for between £1,000 and £15,000 - zopa personal loans or zopa business loans) this is added to the amount borrowed and you can chose either a 36 or 60 month period to pay this loan back.

A very good question indeed, especially in these worrying times of apparent financial meltdown around the world.

This question is mainly a concern of potential lenders, as borrows would only ever have the application fee as their maximum potential risk exposure. It was my biggest concern when I first investigated Zopa over 3 years ago, but the research I carried out provided me with the comfort I needed to make an educated decision to use Zopa lending as another form of diversifying my investment portfolio. It has so far been a very successful investment strategy!

The two main questions to ask and risks to mitigate against are:

1. Is my money safe with Zopa?

Yes, when you pay money into your Zopa lending account it actually goes into a segregated RBS account. It is held there until the moment it gets lent out, when it is transferred to the borrower. As this money does not form part of Zopa’s assets, even in the unlikely event of Zopa going bust, your money would be completely safe.

2. Is my money safe with Zopa borrowers?

To protect your hard earned money, Zopa use all the safety measures a bank uses plus a few more. Everyone who wants to borrow is identity checked, credit checked and risk assessed. To diversify risk, your money is spread across a number of borrowers, e.g. £500 would be split between 50 people x £10 each.

A collections agency chases any missed payments on your behalf and at Zopa’s expense not yours. Zopa provide you with a default rate estimate for each class of borrower so you can factor this in your expected returns. Although the current actual rates of bad debt are much lower than the estimates, you should expect some loans to default over the period of your investment. To date, I have been lucky as none of my 150+ borrowers has defaulted so far. And finally you are also protected against fraud.