History of Peer to Peer Lending

Zopa (zone of possible agreement) was the first social lending operation launching in the UK in March 2005 and since has launched in the USA and Italy and has plans to launch in Japan. They are backed by the likes of Bessemer Venture Partners, Balderton Capital and Wellington Partners.   This was followed by the launch of Prosper in the USA in 2006 who were also backed by venture capital and have since gone onto have over 810,000 members and over $175,000,000 in loans. The last figure i saw suggested there are now over 30 peer to peer set up around the globe with more launches planned.    The total value of loans made by zopa UK's site up to 30/09/2008 was just under £26.5 million with bad debts and collections running at less than 0.5%.(of late typically about just under £250,000 a week is being lent out)  The average lender has lent out £1251 and the average borrower has borrowed £4184. (most popular loan purpose car and area of UK with most borrowers Birmingham)

Location	Company
United Kingdom	Zopa
USA	Zopa
USA	Prosper
USA	Lending Club
USA	Virgin Money
USA	Loanio
Netherlands	Boober
Germany	Smava
Italy	Zopa
Japan	Zopa (launch soon)
Sweden	Loanland
USA/Nationally	Kiva (non profit help for developing world)

P2P lending the future

A recent report by Celent Commincation suggested peer lending would reach $1.6 billion this year and then double in 2009 and reach near $6 billion in 2010.   An example of this growth can be seen from Zopa UK as week ending 02/10/2007 £147,120 was lent out but a year later week ending 02/10/2008 £245,200 was lent out so up by over 66%.

How Social lending works

Different P2P lenders operate differently but below is an example of how Zopa in the United Kingdom operates.   To join Zopa you sign up as a lender or a borrower. If you sign up as a lender you then decide how much you would like to lend from £10 upwards. Zopa has Markets and Listings. So Information on lending first.  In the Markets you choose the rate and amount you are prepared to lend at in each market over 36 or 60 months. The markets are A*, A, B, C and Y. A*-C reflects the quality of the borrower and Y is for people between the ages of 20-25. Zopa's system will show you as you put a figure in what your expected return would be after their fee (1%) and bad debts. As an example if you offered to lend at 10% to an A* borrower over 38 months your expected return would be 8.5%. When you lend money in a zopa market you are ranked by  date  when you offered the money and interest rate offered so if a borrower wanted to borrow £5000 the lenders offering the lowest rates  from £10 to £5000 would be part of the loan. While you are waiting for money to be lent out Zopa pays you interest of base rate less 0.75%.   Listings are more like an online auction where a borrower publishes information about themselves like loan purpose, loan amount and income/debts and lenders compete with each other to be part of the loan. For example if someone wished to borrow £1000 and each lender was bidding £10 only the 100 lenders offering the lowest rates of interest on the £10's would be part of the loan when it closes.   For Borrowers, To borrow you sign up with zopa and then a credit check is done and subject to them deciding you are creditworthy you are assigned the market you could borrow in or alternatively you could put up a listing and let lenders bid directly on your loan request. Zopa charge a transaction fee of £94.25 to borrowers and loans can be between £1000 and £15,000 over 3 or 5 years. One very strong feature is that as a borrower you can pay it back at anytime with no early re-payment penalty. It is worth noting that zopa will only accept borrowers with a good track record and it has been reckoned that less than 50% of the UK population are eligible.

Is it safe?

From a borrowers prospective it is 100% safe as it is just like taking out a loan with a bank except that the interest is being earnt by members of the public rather than a bank or building society. For lenders there is the risk of bad debt but by having a broad spectrum of borrowers with loans from yourself and by setting your rates at a level that compensate for the risk of default you should be ok plus you have the benefit of the underwriters who if in doubt will err on the side of rejecting a loan application. From my own perspective after 16 months  to date i have not had a bad debt even though my rates were set on the assumption that i take £150 of bad debts each year.

How do the peer to peer companies make money?

Each P2P lending company will charge differently but here is how zopa charge. All new lenders pay an annual fee of 1% on the amount they lend to borrowers but are not charged for money not lent out. This fee is accrued on a daily basis equivalent to 1% per annum and deducted monthly. Borrowers pay £94.25 but only if they accept and complete the loan.

Why do people lend to total strangers rather than putting their money in the bank?

This is a very common and understandable question. The answer is people do it for a variety of reasons. Some because they hate banks and financial institutions so for them it is an attempt to get back at the banks, for others it is a social thing and an opportunity to give something back to society by lending at a lower rate than the borrower could get from a financial institution and for others they see it as an alternative asset class or an opportunity to get a higher return than they could from a savings account. On Zopa i have seen the two extremes with money being offered to borrowers at as low as 1% and as high as 20%.