Borrow and Lend without a bank.

Discussion in 'Business & Economics' started by Mrs.Lucysnow, May 15, 2011.

  1. Mrs.Lucysnow Valued Senior Member

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    Savers fed up with the derisory interest rates offered by banks have lent £125m directly to borrowers via Zopa, the online “peer to peer” lender.

    For the last six years a project in the UK called Zopa, has been offering a peer to peer lending program that cuts out the banks. http://uk.zopa.com/ZopaWeb/


    Money Week: Zopa is a unique online exchange that matches up cash-rich individuals directly with needy borrowers seeking modest loans. The name of the business comes from the "zone of possible agreement" between two parties in a negotiation. The idea is that the market sets the going rate, and both lenders and borrowers get a better deal by avoiding using an overheads-heavy, profiteering bank.

    Lenders can lend from just £10 up to £25,000 (or even more if you spend £380 on a consumer credit licence; Zopa will tell you how). You set the rate at which you are prepared to lend, depending on the risk profile of potential borrowers, and borrowers take up the best offers. It's like a mini version of the corporate bond market, where investors set the rate at which they buy a company's debt based on its perceived creditworthiness.

    And the Zopa formula appears to be working. As of December, the firm had 228,000 members, of whom about a third are lenders with 12,000 currently active. Loan disbursals are up some 140% year-on-year, and this month is set to be the biggest ever, with over £1m lent so far. Since launch, Zopa has lent out £30m. So it's still a marginal player in the overall loans market, but it's growing fast.

    Is Zopa safe?

    After four years, Zopa reports an overall default rate of only 0.18% (against a predicted default rate at launch of 1.6%). They claim to carry out all the same credit checks (using Equifax) as the banks, and then some – turning away about half of all borrowers, including anyone with a poor credit history or without a regular income. In addition, if you lend more than £500, you are strongly encouraged to spread the risk by splitting your funds among multiple borrowers. Zopa also limits defaults by building a sense of a microfinance community, and by simply not offering bigger loans (over £15,000) to risky groups of borrowers. When defaults do occur, Zopa chases up bad debts just as banks do, and if Zopa goes bust, its collection agency is contractually obliged to continue enforcing collection.

    Any negatives?

    There are some investment risks to bear in mind that apply equally to similar rival sites, such as Kiva. Zopa is not a bank, it's an online marketplace, more akin to eBay or Betfair than to Barclays. So although it is regulated by the Office of Fair Trading and is a member of the Finance and Leasing Association and anti-fraud association CIFAS, it does not fall under the remit of the FSA. So none of your money is protected by the compensation scheme that bailed out Icesave depositors.

    Also, compared with more traditional places to park your money – cash Isas, index-linked savings certificates, government or corporate bonds – Zopa is more hassle. In particular, lenders gradually find their portfolio of loans takes a bit of tending. And while your money is sitting in the market waiting to be snapped up by a borrower (perfectly possible if you pitch your offer at too high a rate of interest) it will be earning a less than appetising 0.75% below base rate. Lastly, your cash in Zopa is not currently eligible for wrapping within a Sipp, and all earnings are taxable.

    http://www.moneyweek.com/personal-finance/how-safe-is-social-lending-14542

    I have been wondering why there isn't anything like Zopa in operating in the States at this time. Do you think its a good idea?
     
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  3. BenTheMan Dr. of Physics, Prof. of Love Valued Senior Member

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  5. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    I have sold two properties I owned, when I did not need the proceeds by granting the buyer a "purchase money mortgage" after modest down payments (about 10 or 15%, I forget).- I.e. I acted like the bank.

    One has now been fully repaid and the other is on schedule with payments and more than 2/3 paid. It was with 7.25% interest, more than I could safely get when granted and less than the buyer would have paid to the bank.

    Both were in Howard county, Maryland. There the deed the buyers got, already transfers the property ownership back to me when I show real estate related court (I think) or land records office that the mortgage is in default. I think all I would have needed to do is claim it was in default and the buyer would need to show it was being paid on schedule.

    The buyer of the now fully paid condo-apartment lost her job and had some health problems, not in the same year, and we mutual worked thru them fairly. When she was re-employed and healthy, she sent me without any request $500 extra with one monthly payment as a "thank you."

    I am obviously happy to be getting 7.25% interest on schedule, so this can work out well for both buyers and sellers. That buyer has the right to pay off the balance at any time, but has not yet done so. The lady buying my old condo did send the last 5 or 6 thousand dollars to me in one last payment.

    ---------
    I note that this is not uncommon in China and there a serious problem for the government trying to control the housing boom (bubble?) by raising bank reserve requirements, etc. As I recall they have been raised about every 30 days on average since October 2010! (eight times!) Banks pay deposit saving half or less of the inflation rate, so people with surplus fund prefer to lend them to someone building a house, etc.

    Four or five months ago, banks were permitted to offer gold accounts - I.e. you give X amount of Yuan to the bank and they credit your account with Y grams of gold. This is IMHO a clever move by the government. It takes some of the "hidden money" still making loans out of circulation to fight inflation. As I recall yuan equal to eight billion dollars were deposited in the new gold accounts in the first month (or two? - I forget). It also makes the Chinese people help China buy gold. China has been for at least four years the world's largest producer of gold and now is by far the largest buyer too. I suggested why / predicted China would hoard gold / in posts more than two years ago. See post here: http://www.sciforums.com/showpost.php?p=2760897&postcount=213
     
    Last edited by a moderator: May 29, 2011
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  7. janineB Banned Banned

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    Peer-to-peer lending sites went from relative obscurity to making major waves. Leading online websites like Prosper and LendingClub were growing swiftly, as the crowd sourced method of obtaining loans has become more and more popular.
     

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