Inflation is creeping up and it’s eating into your savings. Normal savings rates are dismal but if you become a ‘lender’ with Zopa you can get an inflation-beating average of — zopaaveragerate not defined — on your savings. You could even make more than — zopaaveragerate not defined — if you lend to riskier borrowers.

• Find out how you can make over 8% on your savings being a Zopa lender
• So, how does it work?
• Is it safe?

We really like Zopa at Moneymagpie. In fact, Jasmine is a Zopa lender, as she explains in her blog. You do have to be willing to keep your money in it for at least a year and you need to think a bit about what kind of people you would like to lend to and how much you want to make on your savings. But once you get used to ‘pretending to be a bank’, it’s quite satisfying! Here’s how it works.

Crazy name, crazy concept – but it can work.

Zopa stands for Zone of Possible Agreement, which is the area between the lowest amount one person is prepared to get for something and the most the other person is prepared to give for it. It’s basically how people negotiate a price between themselves.

It’s like a really techie version of the way people have always lent money to each other. Say I want to borrow money and you want to make some interest on yours. You put your money into Zopa and £10 of it is lent out to me. I pay interest on the loan and you make interest on it.

Zopa makes money by charging lenders and borrowers a fee. Borrowers pay a transaction fee of £124.50 which is paid up front when the loan application is agreed. Lenders are charged a 1% annual service fee.

By joining you can either become a lender and make interest on your savings, or you can be a borrower and borrow money from other members.

If you’re interested in making some decent interest on your money, this is how you do it:

Step 1: Join

You log on, put your details in and join as a member. Click on the ‘Lend now’ button on the home page. That will take you to another button with ‘Lend now’ on it which you should click again. Then there are a few pages of forms. Bear with it – it’s worth it in the end!

Make sure you keep a record of the security questions and answers because there are a few of them! They will need to get various bits of information such as your date of birth and address which they will then use to check your identity. Once you’re accepted you will need to send proof of identity (to comply with ‘money-laundering’ rules) such as utility bills and a verified copy of your passport and then you’re free to invest.

Step 2: Make your choices

The next part is a little trickier and you will need to read their instructions. You get to choose the interest rate you want to charge the members who are borrowers – and this is where you find out what it’s like to be a bank!

You will want to choose a high rate – but that will mean that it takes a while for your money to be lent out. On the other hand, lending at a low rate means it’s annoying when you see interest rates in the country going up and you realise what return you’re missing.

Also make sure you choose a rate that is inflation-beating. Ideally you should go for at least 4% (that’s the average return for savings accounts over the years) and it’s probably best to go for at least 6%.

What the people at Zopa do is they construct the cheapest loan available for each borrower at the point in time that they apply. This is why lenders, who are essentially competing with each other, are not simply going to charge the highest interest rate possible. Their money will be waiting around too long.

Here are the steps to follow to create a lending offer:

1. Go to the ‘Lending Offers’ page.
2. Click on ‘Create Lending Offer’ which will bring up a screen telling you how much you currently have in your holding account to lend (this is after you’ve been cleared to put your money in).
3. Click ‘Lend Now’.
4. Enter the amount you would like to lend out.
5. Choose a name for your new lending offer.
6. Select which markets you wish to offer in using the tick boxes (so that’s A, B, C or Y with A being really good credit and C and Y being the riskier sorts).
7. For each ticked market, select the rate you want to offer to borrowers (this is the crunch question – remember the higher the rate you want the longer it’s going to take to lend the money out and start making that return). You can find out on that page what the ZOPA (zone of possible agreement) is for that market, in other words, you can see which rates are the most likely to be lent out so you can go for one of those in order to get your money lent out faster.
8. Set the maximum amount of money in multiples of £10 that you’re prepared to lend to any one borrower from this lending offer.
9. Read over Zopa’s loan conditions and agree with them.
10. Click ‘Next’ to complete your new lending offer.

Then you can leave it for a few weeks, just checking in once or twice to see if you’re money has been lent out yet. There’s nothing much more you need to do other than, perhaps, go on their discussion boards and see what other lenders are saying and, maybe, check out some of the new people who want to borrow money and what they want to borrow it for. That can be entertaining!

A few points

As a lender you should know:

• You can lend a minimum of £10 and a maximum of £25,000
• It’s a good idea to check your account every few months to see if you have money that is just sitting in a holding account that should be lent out again to make you more money.

Is is safe?

The safety of your savings is big news at the moment. So if you’re a Zopa lender, how can you be sure you’ll get your money back? Well, Zopa does have several measures in place to safeguard your cash. This is what they say themselves…

• Everyone who wants to borrow is identity-checked, credit-checked and risk-assessed.
• To diversify any risk, your money is spread across a number of borrowers. Your money is always lent out in lots of £10. For example, if you lend £500 or more, your money is spread across at least 50 borrowers.
• A collections agency chases any missed payments on the lender’s behalf (the same process that banks and other financial institutions use).
• And to some extent, you’re protected against fraud. If someone accesses your account without your permission, then you’re not liable for any resulting losses (as long as you’ve kept your personal details secure).
• Finally, you’re given an estimate of the bad debt you’re likely to experience. This means you can take it into account when you set your rates.

Not perfect

Do remember, that although there are lots of safety elements to lending through Zopa (we particularly like the fact that your money is spread across loads of different lenders) it’s not necessarily a safe-haven.

One or more of the people who borrow some of your money could default. However, few have so far and each one only borrows £10 from you so it’s not a major problem if one of them can’t pay. Also, you have to tie up your money for some time and that could be a problem for you.

The biggest factor to consider is that currently Zopa is not covered by the Financial Services Compensation Scheme (FSCS) as all British banks and building societies are. This means that if the whole company fell then much of your savings (the money you lent out) would not be covered.

However, the company points out that any unlent money a lender has at Zopa is held in a segregated bank account to which neither they nor their creditors would have access in the event of a Zopa failure. Sums in this account are covered by the FSCS as it’s with a high street bank.

Also, any money that has been lent out can’t be logically covered by the FSCS since it’s been given to a borrower and therefore probably invested in a new car or a new kitchen.

All loan contracts are between the lenders and borrower directly, so even if Zopa did close, the borrowers would still be legally obliged to make their payments. Zopa has set aside funds to account for the ongoing administration of such loans in such an event.

What you should do now

Go to the Zopa site, take a look around and decide if it’s the kind of thing you want to invest in. Why not dip your toe in the water by putting in a few £100 to start with and seeing how it works? Look at the different kinds of interest rates you could make depending on who you lend to.

It gives you a really good idea of what it’s like to be a bank and try and work out the whole ‘risk and reward’ factor when you’re lending your own money.

Useful Links

• Zopa