D Tel: How to borrow £ 25,000 from a stranger on the internet

I have been trying to work out whether this is a sensible thing to do myself...

Having thought about it for a while I've come to the following conclusions...

While you can set your own interest rates, the higher you set it, the longer it will take to get the money lent as you will have to find 50 separate people to lend to and their algorthms will always lend out the lower rated money first so you will have to be sensible about how much you want to earn if you want it utilised quickly.

Then there's the fact that your money earns abolutely nothing while it is sitting in Zopa's accounts waiting to be lent - all the while Zopa is raking it in by taking your interest and keeping it for themselves. Rather clever marketing on their part to say it is FREE to lend, if you ask me.

I wonder how long it will take to lend all your money?

Then there are the monthly repayments from the borrower which effectively increase the amount of money you will have sitting earning nothing unless you get it lent back out again. As you can only offer a minimum of £500 at a time (to be shared as £10 to 50 separate people) I would imagine that any monthly repayment of less than £500 will be wasting away in your account for a minimum of a month earning nothing before your balance is big enough to make another offer to lend. I suspect you would have to be rather active to keep the money turning over. As your maximum is £25000, the maximum financial benefit relative to teh best savings account is probably £500 pa (assuming the money is

100% utilised all the time) - the effort might not be worth it in the end.

I suspect that the rate would have to be at least 2-3 basis points above the best savings rate to make the risk worth taking (the risks being both the length of time the money is sitting unlent earning nothing and the risk of defaults reducing your payback).

Just my two penn'orth RM

As it's in the telegraph what is this line to the guardian? It gives me a story on Makoko (whatever that is)

But in any case, I saw this on Working Lunch, but none of the details were mentioned. Would be nice to know what they are?

tim

Yes would be interesting to learn more about this.

Why not just go to the site and sign up? - you can then read all the FAQs, help sections, about us sections etc...

In short...no matter how much you lend, you have to spread your lending among a minimum of 50 borrowers to spread the risk. The company collects payments on your behalf and passes them back to you. If a particular borrower defaults, the company sells the debt on to a debt collection agency so that the panel of lenders used for that debt still get a percentage of the outstanding amount back.

The maximum you can lend is £25K - this is because above this level you run the risk of requiring a lending licence.

The way they allocate the funds to a borrower is, firstly, based on the rate of interest requested by each lender and, secondly, based on how long their offer to lend has existed for.

They claim it is free for the lender as they only charge the borrower (1% of the amount borrowed). However, you have to have the money in your Zopa account before you can make an offer to lend and they pay NO interest on that money while it's sitting around waiting to be borrowed by someone. I suspect that this is where they hope to make a significant portion of their income (on the quiet).

Let us assume they manage to achieve the 22000 lenders that they believe they need to break even (can't remember where I read this) and each of these lenders has the maximum £25K lodged with the company waiting to be lent - that's a whopping £550M of funds in their account. For every 1% that is, on average, lodged but not yet lent at any one time (£5.5M) they could earn 275K income per year if it was invested at 5% - surely there are plenty of opportunities to do this? Of course, I suspect that there will be far more than 1% on average uninvested at any one time.

Just my two penn'orth

RM

One thing I don't like is that the fee is taken up front.

As I see it, there is no financial incentive afterwords for Zopa to make sure you get repaid. They have already got their fee.

In message , Biwah writes

Why would anyone want to borrow from zopa when they could borrow from a "normal" source.

I would be somewhat suspicious that any borrower considering zopa was having difficulty getting the money elsewhere, for whatever reasons.

The problem is not the borrowers. The lenders are not going to get their loans back. This is a classic Ponzi scheme. At first the lenders get repaid... and later when enough get sucked in the cash disappears.

ron

In message , ronald writes

OK, whichever way the money goes, it is much more at risk than it seems on face value.

I cant believe there will be a market for this, other than for the fool and his money as a lender, and a borrower who cannot borrow money elsewhere, neither of whom should be brought together by a legitimate organisation.

Thinking about it, I find it hard to believe that Zopa have been given whatever licensing they need.

Well that sounded great, but I was unable to even sign up to the website.

"At a time when it is dangerously easy to borrow money" ....pull the other one eh?

Perhaps they don't need one.

Perhaps they are just a 'venue'

tim

It does not look like a Ponzi scheme, but I am still not in a hurry to put money into it.

"Richard Faulkner" wrote

Supposedly they'll only allow people with very good credit status to borrow. That said, you're right, it's still a duff idea. People with good credit can borrow for 3.9% so they don't need Zopa, and potential lenders can deposit risk-free with A&L at 5.35% gross, so they need a substantial risk premium for this to be worth it.

You've been reading MSE, haven't you? ;)

Personally I found Martin's explanation a little on the simplistic side. He does nothing to quantify what might be needed to tempt a lender over and above the best savings rate currently on the market and he completely glosses over the fact that Zopa expects to get an interest free loan off its lenders while they wait to find at least 50 separate borrowers to take their money at the rate that they want to lend it at. The need to recycle your money month on month as repayments come in, in order to keep it working for you is also ignored in his article.

But then, I guess that his intended audience isn't really interested in that level of detail.

RM

In message , tim writes

I'm sure the web site says they are licensed and regulated by the FSA or someone?

"Reestit Mutton" wrote

Yes, you can 5.35% -- 5.5% even -- with instant access, so to lend it for an unspecified time I'd want a risk premium.

And that's a bit of a killer because you can't actually even quantify it beyond knowing that it's a cost.

I guess he looked at it in enough detail to notice that it sucked, and thought about it no more.

Precisely - but without stating what rate of return might required to justify the risk as a lender his quoting the best savings rate on offer was only telling half the story.

Precisely. He didn't even touch on this and I believe this to be the biggest factor in deciding against using this platform.

To be frank - he would have been better sticking to discussing the borrower's angle as an incomplete argument for or against using Zopa as a lender is worse than no argument at all in my book.

Just because there are rates available to borrowers via CC deals are lower than the best savings rate does not mean that Zopa is doomed to failure. By an extension of his argument the entire loans industry should have bitten the dust years ago. Basically, if everyone took the best CC deals on offer they would simply cease to exist for much longer so the balance would change anyway.

It's all about how high a rate is required to justify the risk and, in my book, the dead-time aspect of the system, coupled with the effort required to keep the money recycled in the system, means that the headline rate of return (i.e. the loan rate) required to make this a worthwhile venture for me is simply too high (probably in double figures). Without the need to actively recycle the money and if they actually paid interest on your deposits while they were waiting to be borrowed I might have been able to justify giving it a chance regardless of Martin's argument.

RM

"Reestit Mutton" wrote

Yeah, was discussing this with colleagues at work today and we concluded that we'd want at least 15% to be interested.

You can get 5.5% off Egg with no risk. If you put 1000 into Zopa and on average it takes a year for Zopa to place it - and there's no way of knowing how long it will take - then you need twice the Egg rate to break even. Even if they place it faster, it's getting paid back, so it needs to be re-placed ASAFP. Dead time, as you say. Let's just say twice 5.5% for now.

Then there's the inconvenience premium. If you want your money back instantly, I don't think you can have it (unless they re-syndicate all your loans to another waiting lender, maybe, but I bet that costs). So I want to be paid for putting up with that, as well.

And finally, I have to price in the piss-poor recovery I can expect if there's a default and the debt is sold at 20p in the .

I have no idea how to price those risks, because retail credit risk ain't my thaaang, but the consensus around the office was at least 4% over 2 x Egg.

I'm actually starting to sympathise with credit cards a bit...

"John Redman" wrote in message news:d0qoal$ri4$ snipped-for-privacy@news6.svr.pol.co.uk...

I can never understand why there is seen to be a problem with Credit card rates. No-one needs to borrow on them, anyone who does so, does it by choice.

tim