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Zopa: Peer-to-Peer Lending Experiences of a Novice

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As a keen personal finance junkie I regularly search for ways to change my account management and regularly assess my savings and investments. I like to move my money around to experiment with varying rates of return and risk on capital. Back in 2010, I became aware of a new type of investment that to me sits between investing your money in property or the share market and keeping your money in a savings account with a bank, known as peer-to-peer lending. Peer-to-peer lending works like a bank except people like you and I lend other similar individuals the money and agree a rate of return. Lenders can use the site to earn interest on their savings (at better rates than banks currently offer) and borrowers can likewise borrow money (at a better rate than credit agencies offer). After over a year of researching peer-to-peer lending on and off, I decided to open an account with Zopa. Zopa is one of the earliest peer-to-peer lending institutions and remains one of the most well-known today.

I first analysed Zopa in October 2010 before I’d started any investing. I thought that this platform was great as it allows regular people to lend money and charge interest rates of between 6.5% and 11% on the capital they have lent. Each person who signs up to borrow through the website is credit-checked and rated on a risk scale. The riskier the borrower (in terms of likeliness that they will default on repayments) the more you can charge for the money you lend. Another plus I thought about is that some people only need to borrow a small amount which is not always available from the bank. This platform allows small amounts to be borrowed and lent which works for everyone. For the service the platform of course includes start-up charges and sometimes an annual management charge. As these platforms were relatively new and there was no regulation however each company states that they will chase up borrowers who default on their payments to ensure that lenders get their money back. At the time I thought that were I to use this platform to increase my earnings on my savings I would only put in an amount I could afford to lose. I also thought that until these platforms are regulated that it’s safe to say that you read all the small print so that you fully understand what you’re investing your money in.

I was very hesitant to use it as there was no financial regulation of the scheme meaning if the company went bust I would lose all of the money I had invested. This is what can put a lot of risk-averse individuals off the idea. Now that I’ve been a lender since November 2010, I speak very highly of the platform. So what’s so great about Zopa?

Even after you’ve paid tax on your earnings and the annual fee to Zopa, the interest rate is higher than the best ISA on the market. You can spread your risk by only lending a maximum of £10 to each borrower. If they default, you will lose only lose £10. The default rate is extremely low currently and given the interest rate you earn on your savings is so high I think the risk is minimal. The Zopa site is also extremely easy to use. A simple dashboard function shows you in a clear format what you’ve lent out and what interest you’ve earned so far. As the interest is paid gross Zopa is also a great help in preparing your tax return to HMRC. Each year they release a template letter tailored to your account that you need to present to HMRC to declare your earnings.

In addition to the investment pros of using Zopa becoming more apparent, I’ve also had a great experience connecting with other Zopa lenders. In February 2011, I attended the 7th Birthday party for Zopa in London. This gave me a great chance to talk to other Zopa members (mostly lenders) and also talk to the CEO Andrew Giles. Bringing all these like-minded investing individuals into one room gave me an extraordinary opportunity to network. It was through this party that I first discovered Funding Circle (another peer-to-peer lending site but instead you lend to businesses).

Zopa continues to have its cons. One of the issues with investing in Zopa is the liquidity of your funds. This platform ties up your money for a long amount of time (up to five years at a time). When I first started investing I intended to keep the money in Zopa for 3-5 years. If I want to take that money out before the end of the loan term, I will have to release it through rapid return which will eat into my earnings. Borrowers can default on their loans meaning you’d have a hard time getting your money back. Zopa promises to do as much as they can to chase late payments on your behalf which means you can sit back and watch your money grow.

Given Zopa has only been running for less than a decade, I rate this as a great way to earn more on your savings. I would advise looking at both Zopa and Funding Circle before deciding to invest. Peer-to-peer lending platforms now come with added security than previously since the FCA agreed to regulate it in a similar way to that bank accounts are regulated. I’ve had a very pleasant user experience with Zopa and continue to be impressed with how they improve their site to make sure the process is as simple as possible. I’ve enjoyed lending money through Zopa and since first opening the account I have doubled the amount of funds I hold in my Zopa account. I can’t see myself closing the account in the near future. I’ve since invested in Funding circle (January 2013) and plan to discuss this in more detail as I become a more experienced user of this platform.