Zopa Loans is the first social lending marketplace where people can lend and borrow money in the UK. Launched in 2005, Zopa stands for Zone of Possible Agreement. The name comes from a business term which stands for the overlap of the lowest a person is prepared to get and the most another person is prepared to give. With a social lending system in place, Zopa loan providers and borrowers deal with one another directly and not with banks.

The Concept of Zopa Loans

Zopa is comprised of an online marketplace where members can borrow and lend money to one another in order to get the best loan deals possible. Zopa believes that this method creates a better environment for its members by cutting out the fees associated with banks. Following in Zopa’s footsteps are the Prosper company in the United States, Smava in Germany and the Netherlands’ Boober company.

Zopa profits from charging borrowers and lenders a fee to use their service. They also earn through any sales of payment protection insurance and helping to find loan providers for those who do not qualify to borrow from Zopa.

How Zopa Loans Work

In order to borrow or lend money with Zopa, there are a series of checks and balances that must be adhered to first. Zopa looks at the credit scores of anyone who wishes to borrow money and then gives them a letter grade (A, B or C) accordingly. If a borrower does not fall in to any of these categories then they can not use the services offered by Zopa Loans.

Lenders make their offers by announcing how much they will lend for how long and at what rate to the letter grade borrowers of their choosing. In turn, borrowers pick from which rates are available to them and choose the one that they like the most.

To prevent risks, lenders with Zopa can only lend small amounts to individual borrowers. Lenders who lend £500 have their money distributed to at least 50 different borrowers. Borrowers must enter into a legally binding contract to repay the money to their lenders. The repayment process is done by monthly direct debit. If for some reason a payment is missed then a borrower will be contacted by a collection agency. Zopa charges a 0.5% transaction fee for borrowers and a 0.5% annual servicing fee for lenders.

The most popular loans among Zopa members are personal loans, car loans, consolidation loans, home improvement loans, and short term loans. All interest rates are set specifically by Zopa lenders with the typical rate being 7.6% APR on a £5,000 loan spanning 3 years in the A market. Zopa Loan enders base interest rates on the borrower’s past credit history.

Lenders may lend anywhere from £10 to £25,000. With social lending, borrowers can receive money from people of all walks of life. Even fellow borrowers can lend money because the system is set up in a way that some lenders are also borrowers and some borrowers are also lenders. An up front 0.5% of the total value of the loan is paid as a fee as soon as the loan application is agreed upon. There is no additional cost if a borrowers wish to repay Zopa loans early.