Zopa - Money Making Potential?

Zopa is a social lending and borrowing website that allows you to exchange with other people in the community. The site was founded through consumer research showing people were fed up with borrowing money from banks who make huge profits and that certain people found it hard to get credit.

The community aspect of Zopa is that the people lending the money are you and me, in fact anyone can sign up and start lending their own money to other members. You get the control to set your own interest rates and to set the market you lend to. When signing up to borrow money you have to be credit checked, the outcome of this then puts you into one of four markets - A*, A, B or C. The better the market you are in, the lower the interest rate you will be able to borrow money at.

Zopa stands for 'Zone of Possible Agreement' and states that the average interest rate is about 6.75% however usually for an A* market this is lower at about 5.5%. This is great for borrowers in this market as the interest is much better than what you would find on the high street. This isn't so good for lenders as after Zopa fees and tax you would be better off putting your money in a savings account.The B and C markets are where lenders are more likely to make a better return, however the risk of lending money is significantly increased. Zopa lets you set how much you are willing to lend each person and they recommend around £10. (Incidentally when borrowing money Zopa will automatically spread the amount you want to borrow over a number of people with your desired interest rate so you don't have to find 1500 people with £10 to borrow £15,000).In each market you have the option of lending over 12, 24, 36, 48 or 60 months, for each you can set the interest rate. Lower interest rates will generally lend your money out quicker however the potential for higher return is there.

I signed up to Zopa back in November 2006, the trial at the time offered £30 free credit, along with that I added in £10 bringing me to the grand total of £40 to lend out. To start with I was over ambitious with my lending interest rates, setting a range between 7% for A* - 15% for C. At the time I didn't think it was worth going much lower as you could get up to 6% on savings accounts and that was risk free.

After two months of my money not being lent out I adjusted the rates slightly, I removed the A* rates as there simply wasn't anything in it for me and I decreased the A (7%), B(8.5%) and C(9.9%) rates to try to get my money lent out quicker. I left my money for three months this time. After having to reset my rates I was a bit put off that I wouldn't make any real gain through Zopa (if there was any real money to be made from a £40 investment that is).

Zopa's weekly emails did not fill me with confidence so I decided it was time to remove my money from Zopa. I logged in to find that half my investment (£20) had been lent out! Making me a grand total of 76p in earnings. This reignited my interest in the website so I set myself the challenge of altering my interest rates to get the rest of the money lent out. I lowered my interest rates to bring them more in line with other lenders. Within 48 hours another £10 of my money was being processed to be lent. A few more tweaks on the interest rates and the final £10 was being processed in a matter of minutes.

Above is a view of my Zopa account. The 1p difference between my Zopa total and my earnings plus my original investment is for Zopa fees (which stand at 0.5%). You can only lend out a minimum of £10 which is why there is £1.56 in not offered funds.

My final lending interest rates looked as follows:

For future lending I am going to consider removing the A market (or increasing the interest) and sticking to the B and C markets. This will increase the risk significantly however will give a better return on investment. I will also allow my money to be lent out for longer periods of time.

Whilst trialling the site I didn't want to lend my money over a longer period of time as I wasn't sure how successful it would be or whether Zopa would be around in 5 years time. However Zopa's CEO James Alexander says that there is risk with any new financial service, however given that Zopa has been around for two years now, is ever increasing its membership base, has recently gained another £30 million in investment funding, that it was in a good stable position.

Zopa is looking to launch in the US this year after having a team based there for the past year. To start with the system will operate separate to the UK however a long term goal is to allow lenders and borrowers to operate in both countries. Zopa's CEO James Alexander states that there are a lot of legal hurdles to overcome especially with financial markets being regulated nationally but with fluctuating currency and interest rates, international lending and borrowing could become very attractive.

It is clear that Zopa has proved that that social lending works and the fact that a new rival starts business every month shows how big this could be in the future. Zopa has a hard balance to strike, it has to entice lenders with the prospect of a good rate of return but also has to show borrowers it is cheaper to borrow from them rather than a high street bank. With two thirds of their 150,000 members being lenders perhaps the balance is not quite right.

As a new way to micro manage your spare income Zopa does present the chance to make money and with a 0.02% failure rate and no fraud Zopa looks like a safe bet.

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