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Zopa loans - Ask our expert

On the subject of Zopa, our expert says...

Hi Shaun,

Thanks for getting in touch. Zopa (www.zopa.com) is certainly a very interesting new development in the credit market and a borrowing option that deserves a closer look.

Basically, Zopa is an online site that acts as a marketplace, where real people can lend and borrow money to and from each other. Known as social lending, it advertises itself to borrowers as “the human way of getting a low-cost loan”.

It works on the principle that both lenders and borrowers will benefit by side-stepping the banks because lenders will receive a higher rate of interest than they would from a savings account and borrowers will pay a lower rate of interest than they would when borrowing from a traditional lender.

As I understand it, to get a loan from Zopa you have two options:

1. You can get a loan on the “Market”, for which Zopa calculates your risk and offers you a certain rate on behalf of the lenders willing to lend at your risk-level.
2. You can use the “Listings” in which you place your own mini “loan advert”, detailing how much you want to borrow, the reason for the loan and why you are a worthy borrower. You can even add a picture if you like. Lenders can then choose themselves whether they want to lend to you, and if so how much and at what rate. It’s similar to an online auction and when your listing ends you will be told whether you met your target and if so what the lowest average rate is that lenders are willing to lend to you at – you can then choose whether or not to accept this. If are taking out the loan for a good reason, the “human engagement” element of listings could mean you get a better deal than on the “Market”.

Now, to answer your questions….

Is Zopa a good way to borrow?

One of the main advantages of borrowing from Zopa is the fact that you can make overpayments on your loan or repay it in full early, without suffering any penalties.

For this reason, it could be a preferable option for someone in your situation. Although the lowest term over which you can apply for a loan is 36 months, if you repay the loan earlier than this there are no repayment penalties.

When I checked yesterday, for a loan of £3,000 over 36 months, Zopa was offering rates of between 8.9% and 12.1% APR on its “Market”, depending on your credit rating.

When Zopa calculates the APR and total repayment amount, included in this (as well as the actual interest which will be paid to the people from which you borrow) is Zopa’s set fee of £118.50 which is charged for each loan completed through the site.

You should bear this in mind if you are planning to pay back your loan early, as while the interest is calculated daily on your outstanding balance (so the total amount of interest you pay will be reduced if you repay early) the fee of £118.50 is added to your loan up-front.

How hard is it to get approved for a loan?

Zopa only accepts borrowers who fit into it’s A*, A, B, C or “Young” categories. If you apply for a loan, whether through the “Market” or “Listings”, Zopa will check your credit rating.

On the site it states that all Zopa borrowers must have:

• An identity Zopa can confirm
• A credit history Zopa can see
• An income that makes their loan affordable
• A good track record of repaying debt (although some young borrowers may not have had much debt to repay).

It also states that Zopa borrowers must not have:

• Lots of maxed-out credit cards
• Very high levels of unsecured debt
• A poor debt history
• CCJs against them.

So, you need a fairly good credit history to be approved for a loan, and the better your credit rating, the lower the rate you will be offered, to reflect the risk you pose.

Will applying with Zopa affect my credit rating?

When you give Zopa permission to access your credit records it makes a data search to one or more of the UK’s credit agencies (for example Equifax or Experian).

Initially Zopa requests a credit quotation and an identity verification search. Zopa says that these types of search, whilst visible on your credit record, do not affect your credit rating.

The only time that your credit rating will be affected is when you actually borrow at Zopa - in this instance, a credit application search is made, which will be visible to other credit providers.

My recommendation

Zopa provides an interesting alternative to high-street lending, and if you have a fairly good credit rating the rate you are offered on Zopa could beat those offered by high-street lenders.

Plus, the fact that you are able to repay your loan early without penalty is certainly an advantage. Interestingly, the most common use of Zopa loans is to buy a new car.

However, as with any loan, there are consequences if you are unable to meet your commitments. If you miss your Zopa repayments, your details may be passed on to a collections agency. The agency will use the same recovery process that the high-street banks use and this could lead to court proceedings against you. Therefore it is important you think carefully before taking out any credit product.

You should also compare Zopa’s offers with deals available to you elsewhere and make sure you have explored all your options, including standard loans, borrowing from friends and/or family and credit cards, to ensure you can make an informed decision and get the best deal.

Ask us a question

If you have an money query please email OurExpert@CreditChoices.co.uk

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