Online People-to-People Loans Enable Borrowers to Avoid Banks

I don’t have statistics to back this up, but I’ll venture to guess that faith in United States banks is at an all-time low. This got me thinking about alternatives to banking and insurance companies.

Turns out that thought of this three years ago. The website allows people to post the amount of money they want to borrow, then find other individuals to lend it to them at low rates.

It’s also an investment tool. From the UK’s This is Money:

…as a portfolio diversification tool, Zopa can be more interesting than keeping the money in a bank or bonds. Financial experts say that somebody wanting to limit volatility in their portfolio should hold between 15% and 20% of their assets in fixed-interest investments.

The system works pretty much like any commercial loan agreement. The borrower will borrow a certain amount of money at a set interest rate for a set time period, which is a maximum of five years with Zopa.

Borrowers are split into four bands – A*, A, B or C – depending on their credit rating and lenders assign the rate at which they are prepared to hand the money over for each band.

All funds are insured, though not by the FDIC. Zopa does take an 0.5% transaction fee, but from what I saw, people can still get some decent rates.

To me, Zopa still sounds sketchy. I associate brick buildings with my money. If there’s no brick building to walk into to retrieve the money, caution signals go off in my head.

Depending on how the financial crisis evolves, that notion may soon change.

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