With traditional lending and borrowing methods being hard to access, there was room for alternative lending and borrowing in the economy. Zopa is one such alternative, a loan exchange that has different operating procedures to the traditional banks. Zopa is an online lending exchange that was launched in March of 2005, followed by American and Italian sites in 2007. Zopa is a borrowing and lending exchange that is designed to offer an alternative to existing financial service companies and high street banks. Since the company’s inception more than £20 million pounds of unsecured loans have been arranged in the UK alone. At present Zopa has 150,000 members in the UK and 200,000 worldwide.

The word Zopa stands for zone of possible agreement and refers to the lowest amount that someone expects to gain from what they are offering and the most that another is prepared to pay for that same offering – a theory that underpins the offering of most goods and services.

Essentially, Zopa acts as a matching service between those who want to lend and those people who want to borrow. In most cases, the money of an individual lender is usually shared out between fifty borrowers. Zopa charges lenders a fee of1percent of their total loan and commission on any PPI selected by the borrower. The current credit crunch has seen the Zopa loan exchange experience an increase in lending of 35%, but this is not yet seen as a threat by the banks. Borrowers benefit because they can borrow small amounts of money over a short period and at relatively cheap rates, which reverses the way loans work in banks, where you pay less for the loan over a longer period. The service is good for borrowers who may have difficulty getting credit by any of the regular means.
 

If there are no bad debts, then lenders get a higher return on their money than they would if they left it in saver accounts. The increase for lenders is around twenty to thirty percent more than they would get from a deposit account, but they do risk losing money in bad debts. There are different markets within Zopa and lenders state their rate including cover for bad debt, depending on the market they are lending in.

Zopa places borrowers into different categories with different interest rates according to the amount of risk they may present to lenders and their credit histories, while lenders decide which level of risk they are prepared to accept. Borrowers who don’t keep up their payments are pursued in the same way as they would be through the banks but the lender is not protected by any compensation scheme, unless they are actually defrauded.