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Last Updated: Monday, 7 March 2005, 13:20 GMT
Q&A: Online lending exchange
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The world's first online money exchange has been launched
Zopa is the world's first online money exchange, promising to put borrowers in touch with people who are willing to lend them money.

The BBC News website asks how it works and what safeguards are in place.

What is the idea behind Zopa?

People with spare cash can offer to loan it to people who need to borrow, through the Zopa exchange.

Similar to EBay and online betting exchange, Betfair, the idea is to cut out the middleman.

At present, when looking to borrow money you can either use a bank, building society or other loan company.

And if you want to lend money to someone you have to stick to an informal arrangement or apply for a consumer credit licence.

Zopa claims that lenders will be able to get a higher rate of interest on their money than through a savings account.

As for borrowers, they may be able to secure a loan at a lower rate of interest than is available on the High Street.

How do I borrow money through Zopa?

When you register your credit history is checked.

Credit reference agency, Equifax, puts you into one of four credit worthiness categories: a,b,c or d.

A is the most creditworthy while d is the least.

At present, only borrowers in credit categories a and b can obtain a loan through Zopa.

Roughly half the UK's population falls into credit categories a and b.

People passing the credit worthiness test will be able to scan the exchange for an appropriate loan.

If they are in credit category a the rate of interest on the loan should be lower than if they are in category b.

The minimum loan you can take out is 2,000 and the maximum 15,000.

How do I become a lender?

People looking to become lenders will have their credit history checked. This is to make sure that they are bona fide.

The lender then chooses how much they wish to lend and whether they want the money to go to borrowers in credit category a or b.

The lender should get a higher rate of interest by lending to people in group b than to those in group a.

The minimum loan is 500 and the maximum 25,000.

This money is divided up between at least 50 borrowers. The idea is to minimise risk to the lender.

The maximum amount a lender will lend to an individual borrower is set at 200.

Are there any charges?

Yes, customers borrow at the interest rate that suits them, based on their personal credit rating. In addition, they must pay a one-off fee equivalent to 1% of the loan they take out.

Zopa will also make money through the sale of loan payment protection insurance to borrowers.

Lenders do not have to pay a fee to use the exchange

Zopa website
Zopa charges a 1% fee on the value of the loans

What if a borrower does not pay back a loan?

Zopa manages the collection of monthly repayments and if any of that money is not paid on time, uses exactly the same recovery processes as the High Street banks.

Zopa will refer the debt to a collection agency. The agency then pursues the borrower for payment and costs.

However, if the debt collection agency does not manage to secure payment then the lender will have to take the loss on the chin.

Zopa estimates that during the next two years 1% of borrowers in the a credit category will default on their loan.

However, if Zopa were, in future, to open its doors to borrowers in credit categories c and d the loan default numbers would probably rise.

What if Zopa goes bust?

Zopa says that in the event of business failure, the loan agreements still stand because Zopa is not a party to any loan contracts; it only provides the mechanism for agreeing them.

The repayments will continue to be collected, Zopa insists.

However, lending money is always risky and an economic downturn often leads to large numbers of people being unable to repay their debts.

If this were to happen, then lenders could find it difficult to get their money back - even from people with a good credit history.

Zopa does seem to have heavy weight backing.

Benchmark Capital, which is putting up some of the money for the venture, has, in the past, backed EBay and Betfair.

And Zopa's chief executive Richard Duvall is a co-founder of internet bank Egg.

Zopa has also been authorised by the Financial Services Authority (FSA) and has a credit licence from the Office of Fair Trading.


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