The following is a guest post from plonkee money. She writes about personal finance from a British point of view.
The biggest peer to peer lending site in the UK is Zopa. In fact, I think it might be the only one. Here’s how it works for Limeys.
Paying Money In
You can pay money in via bank transfer or paypal – you can also add money by phoning up with your debit card, and by setting up a regular standing order. Money in your holding account earns interest at 0.75% below the Bank of England base rate, the very best savings accounts are currently running at around 0.3% to 0.4% above the base rate. You can easily lend any amount between £10 and £25,000 in total. I you want to lend more than £25,000 you need a licence from the Office of Fair Trading (Zopa can help you arrange this).
Zopa charge 0.5% to borrowers on the money that they have borrowed, and 0.5% to lenders on the money that they have lent out. The lenders fee is collected monthly in arrears and is not charged on any defaulted payments, or if the loan has been paid back early.
Lending Money Out – Quick Lend
As the name suggests, this is the quick and dirty method of getting your money lent out. You can set a term of between 1 and 5 years (in whole years) and then set the rate of return that you would like (after fees and expected bad debt).
For each term length there is a Zone Of Possible Agreement (hence the name of the company ZOPA) for the interest rates. A nifty little venn diagram shows you how your proposed agreement fits in, whether it is above, below or at the zone of possible agreement. Zopa point out that if you set it your interest rate too high you risk your money being lent out very slowly. If you set it too low you will get the money lent out pretty quickly (but you lose out on the return).
You can fine tune your offer in all the markets, which are split by length of loan (in whole years from 1 to 5) and credit rating (ranging from A* to C). It shows you the following for each market
- expected rate of return
- lowest and highest offers for the last 5 matched loans
- the percentage that are offering lower than you are proposing
- how quickly you are likely to lend money out
- whether you are in the zone of possible agreement
You can also fine tune your diversification, by altering the maximum amount of money you are willing to lend to any one person. As offers are combined before being lent out, it’s possible that two investors could be lending to the same individual and getting different returns.
Estimated bad debt varies from category to category, from 0.5% to 3.1%. I haven’t seen any information on actual hard figures for defaulting.
A new way of lending money that has just been started is via listings. It’s still in beta testing at the moment, but essentially you get to pick which individuals you would like to fund from the brief blurb that they’ve written and their credit score. You then pick an amount and interest rate that you are prepared to offer, and then after 12 days, offers are combined that will give the lowest possible rate for that borrower.
Once you’ve offered the money out, it goes into processing whilst the borrower is checked out by underwrites. Once it’s been lent you can monitor it’s performance online. You get some details about the people that you’ve lent to – their age, their general location, and the reason that they wanted to borrow the money (mine are all consolidating debt) – and a brief profile that they’ve written. You can also check up on defaults or autolend more money on the same offer.
Zopa is very easy to use – I especially like the graphical representations – and they really go out of their way to make the whole thing clear.
Thinking in particular about lending money, I actually prefer being one step removed from the borrowers. It makes it more of a business transaction, and I feel less judgemental if I don’t know too many details in advance. I’m also not tempted to bid on loans that aren’t going to be profitable
At the moment I’ve only got a very tiny portfolio of loans (lent out at 7+%), but that’s mostly because I’m trying to keep my finances on auto-pilot, and I think that you do better if you are a little more active, as the market for loans changes. If I have a sum of money that I don’t know what to do with, I’ll probably stick some in Zopa. I don’t think I would bother if they didn’t pay money on the holding account. The payments I’m receiving are too low to be lent out, so that money would be earning nothing without the interest.
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