alternatives to unsecured loans
Zopa
Zopa is a sort of eBay for unsecured personal
loans, in that it is an exchange which marries up borrowers and
lenders in an online market place.
It allows individuals to borrow up to £25,000
from other individuals and advertises rates based on what lenders
are willing to pay to certain types of borrower. The latter are
checked by Zopa for creditworthiness and around 50 per cent of
applicants are rejected.
Lenders pay an annual fee of 0.5 per cent on the money they lend
to cover administration costs and they choose whom they wish to
lend to from four different grades of risk --A*, A, B and C.
Borrowers rated A* are those with the best credit score,
representing the lowest risk. Clearly, the higher the risk, the
higher the return for lenders.
With Zopa, there are no early repayment
penalties and if you are a good credit risk, you may be able to
borrow at more competitive rates than from a high street
bank.
For lenders, the attraction is that you can
choose how much interest you want to receive based on the level of
risk you are willing to take. (The higher the risk, the higher the
interest you can demand).
Zopa not only marries up lenders and
borrowers, it collect payments on behalf of its lenders and employs
a debt collection agency.
There is a minimum loan size of £10, but no maximum. However, if
you want to lend more than £25,000, you will need a Consumer Credit
Licence from the Office of Fair Trading.
Zopa says the average annual return for lenders is 6.75 per
cent, though at the riskier end lenders can get 14 per cent before
tax. Lenders are liable to pay standard rates of income tax on
their earnings.
But is it safe? Though Zopa has a Consumer Credit Licence with
the Office of Fair Trading, unlike banks and building societies, it
is not signed up to the Financial Services Compensation Scheme.
The FSCS will repay individuals who lose money as a
result of the failure of financial services companies such as
banks. So Zopa do not have this security.
However, Zopa says only 0.2 per cent of its borrowers default on
loans, equivalent to one in 500, compared with a typical rate of
about 5-7 per cent suffered by high street banks.
To reduce the risk to individual lenders, anyone lending more
than £500 has the money spread across at least 50 borrowers.