Banks make a fortune from their borrowers. If you don't want to make their shareholders rich, there is an alternative. You can even become a bank yourself!
As I wrote earlier this year in A Tale Of Two Bankers, bankers are no longer seen as bowler-hatted pillars of the community.
Indeed, with personal borrowing hitting an all-time high, banks face constant criticism for lending too much, making excessive profits, and keeping their best deals for new customers. To some unhappy customers, the only difference between a banker and a highwayman is the mask!
One organisation which is trying to break the banks' grip on lending is Zopa, the first online financial exchange created to introduce borrowers directly to lenders/investors. Zopa enables person-to-person lending, so you can either earn money by becoming a lender, or borrow money from other Zopa members at competitive rates.
As someone who likes to cut costs by eliminating middlemen, I think Zopa is a pretty cool idea (and I like the sound of the "Bank of Cliff"!). Zopa makes its money from charging an exchange fee of 1% of the amount borrowed, and receives commissions from the sale of payment protection insurance, which isn't one of my favourite products.
Lower rates than even Best Buy lenders
Zopa members set their own rates for borrowing and lending, and the good news is that Zopa lenders can - and do - offer lower rates than even Best Buy personal loan providers. As it's a dynamic marketplace, Zopa lenders' rates change almost by the minute. However, earlier this morning, an A-rated borrower could borrow £1,000 over a year and pay back a total of £1,026.68 (5.0% APR), without payment protection insurance.
This makes Zopa cheaper than any bank, even those offering ultra-low rates for online loans; the next-best deal is £1,029.36 (5.5% APR) from Fool Partner moneyback bank. Even for a B-rated borrower, the total comes to £1,030.87 (5.8% APR), which is beaten only by market leaders moneyback bank and Northern Rock, which tend to cherry-pick only the best borrowers.
Zopa easily tops the Best Buy tables for smaller loans, though you can borrow up to £15,000 and repay over up to three years. Another bonus is that Zopa borrowers can repay their loans at any time, without penalty, whereas most banks charge early settlement penalties.
Of course, Zopa makes the same credit checks that banks do, but borrowers have found Zopa lenders to be more flexible than mainstream lenders. They are more willing to look at the person, as well as their finances. Hence, they are willing to lend to many credit-worthy people that the banks choose to overlook, such as self-employed workers, or those on irregular incomes. However, you will need an annual income of £25,000 or more to borrow from Zopa, which excludes about two-thirds of working adults.
Beat savings rates as a Zopa lender
Even if, like me, you 'don't do debt', you can join Zopa as a lending member. To spread the risk, each lender's money is spread among at least fifty borrowers and, likewise, each borrower gets their money from a host of different lenders. The minimum investment is £500 and interest is paid monthly.
The average annual gross return for Zopa lenders to date is a tidy 7.6% before bad debt, and is predicted to be 6.4% after bad debt. Then again, in its first six months, Zopa has had no bad debts or missed repayments whatsoever (unlike the high-street banks, whose bad debts are soaring). These returns easily beat even the highest interest rates on savings accounts, so Zopa lenders are happy, too!
When Zopa was first launched in March, I was intrigued by its unconventional approach, but was a little sceptical (I'm a cynic at heart!). However, I've been proved wrong, because Zopa had over 18,000 members by mid-August, so it has really taken off. So, if you fancy dodging anonymous shareholders*, salespeople and queues at your local bank branch, give Zopa a try. You may find fair, competitive and socially responsible lending to be right up your street!
More:Check out Zopa and other great deals in our Personal Loans centre.
* Cliff owns shares in HBOS, parent company of the Halifax and Bank of Scotland.
