What Is Zopa and How Does It Work?

What Is Zopa and How Does It Work?

Zopa is an emarket for borrowing and lending money. It started in the U.K. in March 2005, and is coming to the United States later on. Borrowers are screened for their ability to repay and grouped into markets (A, B, C, etc.) based on creditworthiness and soon, on other factors of interest to lenders (demographics, purpose of loan, etc.). Borrowers specify the amount they want to borrow and the term they prefer (six months to 60 months). People who have money to lend choose the group that they want to lend to (A, B, C, etc.), the term they prefer, and the interest rate they’d like to receive.

Borrowers and lenders are then matched where there is an overlap between the rate that borrowers want to pay and the rate that lenders want to receive—a Zone of Possible Agreement (Zopa).

Spreading the Risk. When the lender commits to a group of people, a term and a rate, his loan is broken into 50 different individual contracts. Each lender is actually lending to 50 different individuals in his chosen market, thereby spreading the risk. If a single borrower defaults (which has yet to happen), a third-party collection service will try to collect the loan and, if they haven’t succeeded within 120 days, they will purchase the loan from the lender. Lenders are guided upfront on what level of bad debt to expect in each market so they can factor that into their real rate of return. Borrowers may   also purchase repayment insurance to protect their ability to repay in the case of accident, long-term illness, or unemployment.

Returns and Benefits. Borrowers repay principal and interest each month. Lenders can then re-lend from the proceeds, if they choose to. Lenders are receiving average interest rates on money lent out of 7.3 percent before any bad debt (and there have been no loan defaults, to date). Lenders also have the satisfaction of helping people realize their dreams. Borrowers are borrowing at rates that reflect their credit risk, the term of the loan and how much they want to borrow. In practice, they are borrowing at rates from 4.8 percent, a full one percent below the best personal loans in the U.K. market, and at an average rate of 7.3 percent, some 45 percent lower than the average rate in the U.K. market for prime customers. Borrowers with multiple income streams and non-nine-to-five jobs are more likely to be able to borrow at great rates through Zopa than from banks, because Zopa takes a broader view of individuals’ money and their ability to repay. Zopa borrowers also gain more flexibility—there are no penalties for early loan paydowns and borrowers can repay in lumpy amounts.

How Does Zopa Make Money? Zopa makes a commission of one percent on each loan. Zopa also receives commissions from sales of repayment insurance. Zopa is a very low overhead organization. Many of its 25 staff work part time. Much of its operations—IT, Web development, member authentication, credit information, and collections—are outsourced. Business strategy, credit assessment, marketing, and customer service are handled in-house. As the flow of money borrowed increases, Zopa’s revenues increase.

Obtaining a Loan—Freeformer-Style

There are three easy steps in Zopa’s loan application process, all of which can be accomplished in about 15 minutes (providing that you have your financial records handy—Zopa warns you that you’ll need these before you start):

• First you become a Zopa member.

• Second, you gain a credit rating.

• Third, you get offered a loan, matched with lenders who want to lend money to people with your credit rating.

Step One: Become a Zopa Member.

The Zopa community is only open to qualified and serious lenders and borrowers. First, you need to be eligible—which means that you need to be over 18, living in the U.K., and have a bank account in a U.K. institution.