Michael Clarke, “This is Money” provides an informative update on Zopa.

Create your own bank | This is Money

Zopa is the world’s first online lending and borrowing exchange for individuals, where the banks are shut out. Launched in March last year, the service now boasts 80,000 members, many with strange usernames such as Milkmongoose and Cowgirljo.

The concept behind Zopa – Zone Of Possible Agreement – is simple. It matches individuals that want to borrow money with those that are prepared to lend money at a rate which both parties are happy to accept. The service gives borrowers the opportunity to obtain money at much lower rates than what they would secure from the High Street.

For example, loans can be below 5%, compared to the lowest rate of 5.6% available on the commercial market.

They make money by charging borrowers.

Zopa makes money charging borrowers a one off 0.5% fee which is added to their loan. Lenders pay an annual fee of 0.5% of the amount they are lending.

Zopa is the world’s first online lending and borrowing exchange for individuals, where the banks are shut out. Launched in March last year, the service now boasts 80,000 members, many with strange usernames such as Milkmongoose and Cowgirljo.

The concept behind Zopa – Zone Of Possible Agreement – is simple. It matches individuals that want to borrow money with those that are prepared to lend money at a rate which both parties are happy to accept.

The service gives borrowers the opportunity to obtain money at much lower rates than what they would secure from the High Street. For example, loans can be below 5%, compared to the lowest rate of 5.6% available on the commercial market.

But it is lenders, who can put up between £500 and £25,000, that are flourishing under the system, with many finding they are getting better returns for their money than through traditional savings accounts.

Zopa claims that the service is like investing in another asset class, other than shares, property or cash, that will give a portfolio more diversification.

The lender sets the rate at which they are prepared to lend and the amount they wish to offer. As with any supply and demand model, you are likely to attract more custom if you set your APR at the lower end of the spectrum.

But Zopa says the average return is 6.8% before fees, tax and bad debts have been taken into account. With most general savings accounts paying below 4% after tax, this is a healthy rate of return. Lenders can earn better returns if they are prepared to take more risk and offer money to people with slightly tarnish credit records.

Zopa splits borrowers into A and B categories depending on their credit rating. The average gross return of a three-year loan rises to 10.6% if it is made to a category B person to reflect the increased risk.

To minimise the risk of bad debts the lender’s investment is carved up into small chunks and distributed between several borrowers and it’s not possible to lend more than £200 to any one borrower. Zopa claims this has kept the bad debts to less than 0.05%, but, as with any form of lending, there is always a risk of defaults.

Co-founder James Alexander claims that borrowers’ credit records are also checked with the three main credit bureaus. The organisation is regulated by watchdog, the Financial Services Authority and the Office of Fair Trading.

Zopa makes money charging borrowers a one off 0.5% fee which is added to their loan. Lenders pay an annual fee of 0.5% of the amount they are lending.

Ian Heathcock, a computer worker from North Staffordshire, started lending over the exchange in March in order to get a better return on his savings.

He said: ‘So far it’s gone well. The repayments I have been getting back, I have been reinvesting so it’s a bit like a snowball effect. I’ll see how it goes for a year before deciding whether to carry on.’

• Find out more at http://www.zopa.com