Zopa Open for P2P Lending in the USA

Zopa, the P2P Lending company from the UK has now opened its virtual doors in the United States. Zopa has been providing a P2P marketplace in Italy and the UK for some time now. The rates that they are offering to borrowers (currently starting at 8.75%) for unsecured loans are quite low and can go as low as nothing with help. The rates provided to lenders, although greater than a government CD, are not outstanding, but Zopa’s differentiating factor from other P2P lending sites is that Zopa loans are guaranteed.

To summarize and simplify Zopa’s somewhat complex model, let me walk you through the steps as a lender — How Zopa Works:

  1. Register and open an account with one of the member credit unions.
  2. Lend money to the credit union at a flat and guaranteed rate which is higher than a CD, but is also backed by the FDIC up to $100,000.
  3. You pick a small portion of your return (called help) and give to a particular borrower(s) to lower the borrower’s monthly payments.

So again it is a guaranteed flat rate of return which is greater than a 1 year CD, unless you choose to lower the return to give the difference away. The return is less than you might earn with Prosper or Lending Club, but you do not take on the credit risk, so your principle is not at risk. You are lending money to the bank and not directly to the individual in this case. So to inject the P2P aspect of the lending, Zopa allows you to give away a bit of the differential between the rate at which they loan out the money and interest that they are paying you. So if you loan Zopa, er, rather the credit union via Zopa, lots of money, you can discount the rate at which your uncle, bother, or sister (or the girl who has a cute picture — and I expect to see lots of attractive pictures posted at Zopa) borrows money by you giving the borrower a bit of the return to lower their payment. According to the marketing material, everyone wins. Well, as long as the lender is happy tying up their money for a full year at rates just slightly higher than a government bond – or less than government bond if the lender prefers to give more juice to borrowers. And of course Zopa wins who takes no risk on the transaction since Zopa is actually a middle man between the credit unions and the individuals.

The True Irony of Zopa

Did you catch that last bit? My review of Zopa is that it is ironic that a web 2.0 P2P lending site is actually serving as middle man between borrower and bank and lender and bank. Zopa has injected themselves into the middle of a transaction that you could have more directly entered. Very ironic, but at least they do seem to offer good rates and an interesting concept.

Update: Zopa Borrowers Receiving Negative Interest Rates on Loans

More than ironic… What is the point of using Zopa lending to a relative? If your purpose is to gift a relative some money by lowering their rate by lending your money at less than the going rate, might I suggest you simply gift the relative some money instead and cut out the middle man?=

Zopa Explained in their own words – To save you from clicking through all the How Zopa Works screens at the offical website, I have posted the marketing text here minus all the nice pictures. And what is up with the cupcakes? All the references to cupcakes seem more like fruitcakes to me…

To show you how Zopa works, we thought we’d tell you a story about Becky and Bob. Becky needs some money, and some help with the loan payments. Bob has some extra money, though he’s not excited about the idea of losing any of it, and he loves cupcakes. The cupcakes matter. Read on…

Becky is a baker and wants to start a gourmet bakery in her neighborhood. She needs $7,000 for a professional-quality oven. She’s got good credit (a FICO of 640), so she’s eligible for Zopa. She applies and receives an unsecured personal loan on Zopa. In the process, she joins one of our partner credit unions with just a click. She gets a great rate – almost half of what she’d pay at a big bank. But she can lower her payments even more…

Becky’s profile tells other Zopa members buying Zopa CD’s that she’d like some help with her loan. She can post an essay, pics of the oven she’ll buy, the logo for her new bakery, even a video of her mixing up her “mystery chocolate” cupcakes. She can even promote her profile off the site, using email, her blog, or her Facebook or MySpace page. That way, friends & family can help her without losing any money – or a friend.

Bob’s parents just gave him $10,000 as a graduation gift. So far, he’s stifled the urge to buy some new wheels…for now. So he’d like to put the money somewhere for a while, and earn something better than he can get in a checking or savings account. But he doesn’t want to lose any of it, and he’ll need it back in 1 year. Enter Zopa. The Zopa CD is a guaranteed and insured investment. It pays a higher rate than comparable choices. So he applies, and in the process joins one of our partner credit unions. But now, the cupcakes come in…

A Zopa CD must help at least one borrower. So Bob finds Becky’s profile. Mmm, cupcakes! He decides to pick her. Bob can set the rate and amount on his Zopa CD. As he sets that, he raises or lowers the help that he wants Becky to receive. Bob’s help becomes a monthly benefit to Becky that reduces her monthly loan payment. That’s good news for Becky!

So our story has a happy ending. Bob gets a great return without any risk, and he helps Becky make better cupcakes. But this is where you come in. If you’ve got some money to spare, Zopa is the place to share it and do some good while you earn a terrific rate, risk-free. And if you need to borrow, it’s most likely your lowest-cost option. And it’s darn sure the friendliest. Why not give us a spin?

… a nutty fruitcake.

What does Zopa Mean? I was wondering this and you can find the answer in the FAQ: “Zone of Possible Agreement and is the overlap between one person’s bottom line (the lowest they’re prepared to sell something for) and another person’s top line (the most they’re prepared to pay for something).” Zopa is also just one letter difference from the Russian word for a$$ — Zhopa.

Zopa is calling this whole concept Social Finance:

We’re coining a term to describe what we do. It’s called social finance. It means we want to improve the tools of financial services–investments, and loans, and so forth–by allowing people to use them to help themselves, and other people, at the same time.

There are lots of variations inside the world of social finance, like online person-to-person (“P2P”) lending, which we pioneered in 2005, and the world of international microfinance, which we admire…

Every bank is about sharing money–your money goes in, they share it with other people, called borrowers. They pay you 2%, then charge them 18%. But it’s not very satisfying, since you don’t know, and can’t say, who you’re sharing with. And too much of that money goes to polish all those marble floors.

Social lending? To me Zopa sounds like the Web 2.0 way to generate lots of publicity for an incredibly complex way to gift people part of your earned interest.

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