Social lending, realiability is the issue

February 19th, 2007 at 12:00 am
 


To some, social lending is already old news but others still view the concept as something new. Some are even intimidated with the system since it can be a little confusing, and can be very unreliable which makes it even scary. Zopa.com , Zopa which stands for Zone of Possible Agreement, is a UK company that was founded by a small group of investment and money experts. The basic explanation it that Zopa is a virtual marketplace for money lenders and borrowers.

In social lending, there are no bank intermediaries, the lenders and borrowers deal directly with each other. With social lending, lenders pool their funds together and lend them to borrowers at a given interest rate. Borrowers will set how much they need and the maximum interest rate they will pay. Lenders similarly will give how much they want to lend and at what interest rates. The role of Zopa is to make sure that lenders will get their returns and borrowers will get the lowest interest rates. The company is also in charge of making everything behind the names and behind the deals legitimate. Zopa will look first at the borrower's credit score to determine if he/she is eligible. If the credit score falls below a C rating then the borrower is not allowed to borrow any money. Lenders will then make known their offers to the borrower. Borrowers will determine and choose which offer is best for their needs. To reduce risk, Zopa only permits lenders to loan small amounts and keeps a good watch over the borrowers to ensure that they will pay their monthly dues.

Zopa charges 0.5% transaction fee for borrowers and a 5% annual fee for lenders. Zopa started its service in the UK and pretty much centered their operations there. But recent development in the company had indicated their solid plans to reach to the US market. They are already advertising this development in Zopa.com. We just have to wait what their US offering will bring and how they will fare against US based Prosper.com, a social lending leader in the US.

The problem with these kinds of transactions is the fact that the internet harbors an equal number of unscrupulous and honest individuals. And any transactions regarding money, especially if you're dealing with mainly faceless individuals in the Web, it brings doubts and mistrust on the side of both the lenders and borrowers. Zopa understands these misgivings and issued comments, clarifications, and official statements in the past to reassure the public that money transactions done through Zopa is legal and safe. Zopa claimed of conducting credit, ID and fraud checks that an ordinary bank does. To some, however, this is not enough of an assurance. It is great now to observe how Zopa will approach the US market. So far Zopa has been able to market its services well in the UK. It seems Prosper.com is doing well, and there's nothing so far that we could think of which would affect Zopa.