Zopa: Is Social Financing Better Than a Bank?
Social Financing
Before you run out and begin thinking that social financing is going to help you pay your mortgage, understand that loans are small, but they can prove helpful in many ways. It is also not entirely without the use of a credit union.
How It Works
The basics of how it works is by connecting those who wish to invest in the “Zopa CD” with those who need to borrow for business or other needs. The intent is to keep rates low for borrowers, even adding other benefits to minimize the cost of borrowing, while giving good rates of return in a safe investment vehicle for the investors. Sounds like a win-win scenario, doesn’t it?
According to Zopa’s comparison, their best rates (those with great credit) are only 8.49% while investors can get 3.75% in the 1-year CD. Of course, they paint a prettier than reality picture, as they state banks personal loans are considerably higher (the lowest being 11.55%) and that bank CDs give only a average of 3.65%.
My Own Comparisons
Here are some of my own comparisons…
I have great credit (over 720) and my credit card only charges 7.99%, assuming I don’t pay it off each month. Why not just use your credit card since these rates can be fixed (mine is) on both a personal and business level? With good credit and reasonable qualifications, you can secure a credit card well over $10,000 dollars, even giving mileage or other benefit, that has a lower rate.
As for investing, CDs are OK, but there are numerous other options, not to mention having your money “tied up” is not overly appealing. Besides, the CD rates shown on Zopa only show an average of the top 10 banks. There are many banks that provide greater rates on their CDs as well.
That doesn’t mean Zopa will not be the best deal for you. Zopa’s real benefit comes in the form of members helping out, hence the social financing term. Investors can provide money for borrowers they chose to help by providing monthly payment if you will. That benefit lowers the cost of borrowing for loan recipients. So, if you want to borrow and feel that you can attract “investors”, you could end up borrowing at little or even no cost at all.
As with other financing and investing options, Zopa is likely worth looking into to meet your own needs. However, caution should be taken and deeper research are required before you make the final decision. I can see potential opportunities to for borrowers to keep costs minimal and for investors to assist those borrowers while receiving a fairly decent rate of return.
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This article published on Monday, April 14th, 2008 at 2:07 pm | Contact the editor
Topics: Economy, Product Review
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Writer for national real estate opinion column AgentGenius.com, focusing on the improvement of the real estate industry by educating peers about technology, real estate legislation, ethics, practices and brokerage with the end result being that consumers have a better experience.
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Hey Robert, I think the concept is genius – nothing like utilizing social media to do something creative. I just visited Zopa.com and you can even see what different people are borrowing money for. Talk about getting involved in choosing who will borrow your CD money.
I remember when INGDirect came out with their Orange accounts and how different the whole Internet Banking concept was – I’m curious to see how it pans out.
Robert,
What an interesting concept that is – I looked around Zopa’s site a little, and found their ‘how it works’ to be pretty creative. Looks like it might just be worth a little consideration….
I don’t think anything could be better for this country than for something like this to catch on and the big banks to lose their stranglehold on the American people. I would like to see social networking at the local bank level — so that borrowers and depositors would become attached to people. It would facilitate community and break the big bank cycle. It would keep the money inside the local communities.
I read about something similar called Kiva — http://www.kiva.org/
You can lend to entrepreneurs in the developing world to help eliminate poverty. It’s a great idea, and of course, you get to see their profiles and receive updates.
After reading a bit on the “how to” at Zopa.com, I can see that it may be a much better route than prosper.com. 20 months ago, I invested $1000.00 at Prosper.com, bidding on borrower’s request at a rate of $50.00 per borrower. I opened up 20 loans with an average rate of return in the 18% range. After 20 months, I have a net earnings of $259.00 less defaults, bringing my gain to $125.00. I’m no financial genius, but I calculate this out to being an 7.8% annual return. The current problem I have with prosper is that of the 26 current loans (the proceeds re-invest themselves as well) only 23 are current, and when there is a default, my profit is slashed. That is why my $259 is only $125. I should have been realizing a return of approximately 15.54%.
But, that’s risk, and considering I haven’t had to do anything to manage the account, 7.8% is, well, just okay, but nothing to be terribly excited about. And, it’s not secured or guaranteed…so I could lose it all.
I would prefer to be investing somewhere that would yield a 30% return…who wouldn’t?