A new form of direct lending is gaining ground in Britain, giving better rates for savers

SAVERS IN the UK are now getting below-inflation returns while borrowers, if they can get loans from banks, are paying high rates. Banks, meanwhile, are replenishing their coffers with healthy margins.

However, there are other options, judging by the rapidly-growing success of Zopa, the first in a growing number of peer-to-peer lenders, who are matching lenders and borrowers with entirely web-based creations.

Founded in 2005 by Richard Duvall, the creator of one of the first of the internet-only banks, Egg, Zopa is now lending up to £5 million (€5.9 million) a month and its pace of growth is accelerating.

Depositors declare the preferred rate of interest they wish to receive when they join, although Zopa warns that people seeking too high a rate could find their money staying unused and earning no interest.

From there, it is “packeted” into £10 loans that are spread among borrowers – a necessary safeguard to cut down on bad debts, since the lender, and not Zopa, suffers the cost of bad debts if they occur.

So far, bad debts are rare – just 0.7 per cent of all the money disbursed, helped by stiff credit-checks and refusals for three-quarters of all loan applications received, said Zopa’s spokesman, Martin Campbell.

Few of the borrowers are seeking money to start new businesses. Most, instead, have the usual needs: a new car, replacing the kitchen, or debt consolidation for those who realise that they are paying too much elsewhere, says Campbell.

Zopa charges lenders a 1 per cent fee for handling the amount they invest, while borrowers pay a flat fee of £124.50 once their loan is approved, along with the interest charges. In 2010, lenders achieved an 8.1 per cent return, after charges.

Most of the savers drawn to Zopa are keeping investment small, but it has “a couple of hundred” who have put in £25,000, while a few have invested “hundreds of thousands, making it a substantial part of their portfolio”.

Investment and borrowing are restricted to UK residents.

The company, which has just 35 staff backed up by ultra-modern software to screen out unreliable borrowers, is growing fast: “Last year, we loaned twice as much as we did in the first four years put together,” says Campbell.

The peer-to-peer lending model will continue to grow, he believes, even if banks begin to lend more freely in coming years “since we don’t have the kind of enormous infrastructure and glass headquarters that they have”.

“We have just 35 staff, which is a great advantage, and the whole business is web-based. We could double or triple the size of our business and only have to increase our numbers to 50,” Campbell says.

On the back of the success of Zopa – which stands for Zone of Possible Agreement – a number of competitors have followed, including Quakle, Yes-Secure, Funding Circle and Rate Setter, though the terms and conditions differ in certain areas.

Rate Setter, which has lent just £730,000 so far, charges lenders 10 per cent of the interest that they receive, while borrowers pay a £115 flat fee for a three-year loan on top of interest.

It has a fund to cover bad debts, though this requires a fee from lenders.

Quakle and Yes-Secure differ again, putting it up to borrowers to explain why they want the money and how much they are willing to pay for it. Lenders then bid for a share of the business.

So far, neither of these companies is around long enough to have built up a track record, but some borrowers given A ratings by credit agencies are paying more than 20 per cent for loans, so, clearly, lenders are taking a cautious approach. Zopa’s average rate, by contrast, is 8.2 per cent.

Usually, the only information available to lenders with these two companies is the report of credit-checking agencies, such as Experian, while an aspiring borrower’s other debts and whether or not they own a house might not be checked independently.

Funding Circle, meanwhile, is targeting small businesses, which must produce two years’ audited accounts – thus excluding start-ups – before they will even be considered. Set up last August, it has lent £1.3 million. To date, the average return for lenders has stood at 8.2 per cent.

The maximum interest that can be earned on Funding Circle is 15 per cent. One of the co-founders, James Meekings, acknowledges there is some risk, but he said the fairest comparison would be with the returns made from corporate bonds.