Tuesday, June 26, 2012

Zopa and Social Lending


In a manner not unlike most former university students, my finances suffer from a number of perennial hangovers. Firstly, there is the student loan that we’ll all be paying of ad infinitum; secondly is the all the money we spent on our student overdrafts and credit cards with their foolishly high limits of the early noughties.

Initially, back in 2007, when aged 23 and quite miserable working my first proper job after university, my finances were a disaster. I was employed in Croydon and commuting from Farnham five days a week as a lecturer. The wages, travel costs and rent just did not add up and I found myself floundering. Luckily for me my bank were able to help, albeit with an interest rate on a loan that reflected my poor credit status, but I was grateful they helped at all.

After my one-year contract in Croydon finished, I moved to my current job in Hammersmith. My finances looked up thanks to much lower transport costs, much better wages and living shared accommodation. This meant that in 2010 I was able to go back to my bank, with a better credit rating and renegotiate a slightly lower interest rate of around 18.7% whilst getting rid of a little more debt I’d acquired at university.

Fast forward to June 2012. I am still in the same job in Hammersmith, albeit with more responsibilities than before, but with the wages reflecting this. I am paying slightly more rent to live in Teddington than when I lived in South Wimbledon, and travel cost have stayed around the same for me.

Having checked with a few of the free credit ratings agencies, my score seemed to be ‘good’. Not excellent, average, or poor, but simply ‘good’. This, I assumed, would mean that in my final move to consolidate the last of my leftover student debt – a student overdraft with a different bank – would be easy.

Over the course of 2011 and 2012, I had been receiving almost two-monthly phone calls from my bank about how they could give me a much better rate on my loan if I wanted to refinance it. Having last refinanced in 2010, I thought it best to put off any such decision and said, ‘no thanks.’

When I was called again around May by someone proclaiming themselves to be my ‘Personal Accounts Manager’ – who is sometimes a man and sometimes a woman so maybe not so ‘personal’ – I went along with it, explaining my desire to consolidate the last of my student debts. Imagine my amazement then, bearing in mind my ‘good’ rating when I was quoted an ‘improved’ interest rate of around 27.9% on a 5-year loan for £8,500. The interest alone would tack on the best part of £2000 or more to the total and the monthly repayments could be around £230.

I was left scratching my head for alternatives, but it appeared that there weren’t many open to me, but this wasn’t the case.

On June 8th a story appeared on the BBC’s website entitled ‘Peer-to-peer lending on the internet hits £250m’ and the first name that appeared in the story was Zopa

I decided to have a look around the internet for references to Zopa. Living in the age that we do it is very easy to be suspicious of anything on the internet and I, for one, try to pride myself on being net-savvy. My girlfriend was naturally suspicious, but after finding references to Zopa from a number of reputable sources I decided to give it a go.

Zopa has taken its place as being the number one social lending site because it is just that: social. The lenders are real people, not banks, as are the borrowers. It works by lenders paying money into their Zopa account, choosing what category of risk they are willing to take with their money when lending, and choosing an interest rate on their lending. This provides lenders with potentially much more profitable returns on their money than a savings account with a bank might offer, and there are a number of safety devices in place to protect lenders.

Coming to Zopa as a borrower, I was reassured to some extent by the manner in which they conducted an initial ‘light-touch’ credit check prior to giving me a quote, but they do stress that a credit rating must be good in order to get a loan. As it was, they were able to offer £10,000 at 8.4% over five years, with repayments at around £204 per month, so I went ahead with the application.

This wasn’t the only thing that they are able to offer though. Along with being able to repay the full balance whenever you want, you are also free to pay into your loan whenever you want without any additional fees. Although this wouldn’t reduce the length of your loan, it would reduce the monthly repayments.

With credit checks done, a copy of my bank statement in PDF format emailed to Zopa head office and a couple of phone conversations with a polite member of staff, it was a matter of only 48 hours until the funds were disbursed. I was able to pay off the balance of my old loan, saving around £1000 on interest payments in the process and feel satisfied that Zopa are on my side as a borrower.

Subsequent to taking out the loan with Zopa, I have also raised my concerns with my current bank’s complaints department about the discrepancy between the rate I was quoted by them and the rate I was given by Zopa. I was particularly concerned that many years of loyalty and improvements in my credit score seemed to count for so little. 

There complaints manager, who in part missed the point of my complaint, said that the rate I was given was ‘indicative only’ and may be subject to change following a full credit check. I ask, when they have all of my details in front of them, why base their indicative rates on numbers plucked out of the sky? Why not look at loyal customers’ records first, or even use the ‘light-touch’ credit check strategy employed by Zopa before quoting unrealistic amounts? Who is going to risk the somewhat ironic potential damage of a failed credit check for a rate of 27%? Furthermore, I still wonder whether they would have matched 8.4% anyway!

It’s early days for my relationship with Zopa, but I am hoping that this refreshing alternative to dealing with banks really begins to catch on. 

Important: There are a number of social lenders currently in the marketplace, and borrowers and lenders should always shop around for what is best for them. Social lending in the form of peer-to-peer lending is available in a number of countries ranging from the US and UK to South Africa. Edited December 2016 to reflect the company's new branding.

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