P2P lending the future.

A recent report by Celent Communcation suggested peer to 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, Peer to Peer lending and Zopa 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.   If you want to check out your credit report first to see what the banks think of you you can get it for free HERE

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 with Zopa 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 peer to peer (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 through an organisation llike Zopa 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%.

LINK TO ZOPA

Latest P2P News

15/10/2008 Prosper Filing Registration Statement; Enters Quiet Period Prosper has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future. Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. If you’re an existing lender, your current lender agreements will be unaffected; your existing loans will continue to be serviced; you’ll be able to track and monitor your loans; and you’ll be able to withdraw funds from your Prosper account. If you’re a borrower with an existing loan, you will continue with your current borrower agreement and be unaffected by the registration process.  If you’re a borrower seeking a loan, you will still be able to create a new loan listing, which we will endeavor to fulfill through alternative sources.  As the appropriate securities authorities may consider a new loan listing to constitute the offer of a security, we are unable to post new loan listings on our site until our registration statement becomes effective. A successful registration can take several months, but we assure you we will do our best to move forward as quickly as possible.  Until this process is complete, we’re required to be in a quiet period and will be unable to respond to press, blogger or other inquiries about Prosper or the registration filing until it becomes effective. *   Zopa withdraws from USA market.   Details below from zopa. You probably know that Zopa’s US operation has a very different model to that in the UK and Italy in that it works in partnership with financial institutions (the credit unions) rather than being a pure peer to peer marketplace as it is here and in Italy. So while our model is doing very well in current market conditions, the US has been adversely affected in a way that just couldn’t have been predicted when we launched int he US and is no way the fault of our partners. For us, a real shame is that we weren’t able to launch the original model over there for regulatory reasons. So, sadly, our US colleagues have decided to withdraw from the US marketplace. This decision will have no impact on Zopa’s other activities in the UK, Italy and Asia. Zopa’s UK operation has experienced significant volume increases in 2008 with huge growth in new members and increasing lender returns, while continuing to maintain excellent credit quality - currently less than 0.5% of loans are affected by any kind of late payment issue, with actual losses below 0.04%. Zopa Italy has also achieved the highest growth of any European peer-to-peer operation since its launch in January, and has recently launched the first secondary market for any peer-to-peer operation. Zopa’s US customers’ deposit accounts continue to be insured by the NCUA up to $250,000, and servicing of those accounts as well as the loans will be assumed by the credit unions within 90 days. Zopa looks forward to continuing to develop and expand its operation worldwide as it continues to offer investors a safe return on their investments and a better deal for borrowers, and remains optimistic that it can return to the US market when conditions permit. We’d like to thank our US colleagues for their hard work, dedication and the oustanding service they have provided for their customers. I’m sure you’ll join us in wishing them the very best.