When most people are short on cash and need a few hundred to a few thousand dollars, they walk down to the local bank and try to persuade the loan officer to give them a loan. If the consumer doesn’t meet the bank’s cookie-cutter standards for who can get a loan, they’re rejected and the person’s just out of luck. Those who do get loans are often stuck with unfavorable terms and the only person that wins in the situation is the bank. Now two companies are hoping to empower consumers by offering services which will allow consumers to provide loans to each other online.
When a borrower wants to receive a loan, they will head on over to the Prosper or Zopa website and register for an account. The companies will check the credit of the person wanting to borrow the money and make that information available to any potential lenders that would be interested. The borrower will post how much money they need and an explanation of their story and why the need the loan. Lenders will be able to look at the individual’s story and credit score and then be able to loan some or all of the money that the person needs to borrow.
Prosper and Zopa are two businesses which provide such a peer to peer lending service. Prosper is a United States firm that launched in February of 2006 and is based out of San Francisco, California. Zopa is a British firm that originally only offered the service in the United Kingdom, but is preparing to launch its service in the United States as well.
There are a few differences between Prosper and Zopa. With Prosper individuals with any credit rating can apply to borrow money, even those with over 100% debt to income ratios. Zopa has tougher lending standards than Prosper and only allows individuals with moderate to good credit to borrow money. The fees at Zopa are also a bit lower than that of Prosper. Prosper will charge you a 1% or 2% origination fee when you borrow money, and charge lenders a .5% or 1% annual service fee on each of the loans that they have. With Zopa, borrowers and lenders each pay a one-time 0.5% origination fee. Zopa is certainly a much better deal when for lenders than Propser.
Online lending sites such as Prosper and Zopa are a win-win situation for both borrowers and lenders. The lenders who are investing their money make a much better rate of return than if they would throw their money into a savings account or bond fund, and borrowers can receive a better interest rate than they would at banks because the lenders don’t have all the overhead of branches and employees.