How The Recession Transformed Lending
Try listing five things you love about your bank. give up?
How about five things you hate about your bank? Before you start drafting and editing your reply, I think I’ve got one that’s enough: lending to hardly anyone (and forcing some us to borrow from “payday lenders” as a last resort).
The banks have followed a pattern that is historically familiar: to lend too liberally in good times, not enough in bad. The tragedy is in the lost opportunity for economic growth; good start-ups don’t appear without lending, and many otherwise sound small businesses can’t grow, run into cash flow problems, and may have to scale back (or even fold) without access to short-term cash.
Enter the alternative lenders. And some of them aren’t that bad. Ignoring the all-too-visible internet sharks who typically charge 4000% APR, what’s clear is that if you know where to look, you will see that the recession has forced some reform of money-lending that’s good for the consumer. Take the example of Zopa: think Ebay for lending and you should grasp the idea. When you borrow with Zopa you don’t borrow from them, they put you in touch with a group of lenders (private individuals, not financial institutions) well placed to meet your specific needs. Credit checks are still done in the normal way to make sure nobody loses out, although decisions are more flexible with none of the “automatic” rejections based on this or that detail, as is the case with banks. A key difference is in the Zopa credit rating category of “young”. This is to allow for the possibility of lending to those under the age of 25 with limited credit history. If you’re under 25, have never done much wrong, and wonder why Equifax or Experian rate you as “poor” – this is why. You are probably already familiar with the experience of being rejected for credit. Sadly this also means that Zopa will be more expensive for you, but rest assured, you will at least be considered. In the main, for the creditworthy, interest rates are slightly better than on the high street.
So then, a better rate for you, a better return on an investment for the lender(s) than a savings account or bonds. The downside? If you’re a lender, you’re protected to a degree against default by the spreading of a debt over many heads; also, a bad debt will be sold to a recovery agency, and in this scenario you will still get some return. Like any investment there is a risk element. Currently default rates are remarkably low. For the borrower, Zopa charges a fee of £100 for their service, which you may or may not consider acceptable. On a substantial enough amount, it probably isn’t that off-putting. Another consideration for you might be the lack of regulation in this area, and the inevitable question of the merit of lending at considerable rates of interest to those who simply aren’t creditworth by any standard.
It’ll be interesting to see how the phenomena plays out. Can Zopa continue to offer a clean, flexible alternative, or will it have to emulate the characteristics and apparatus of a financial institution if it is to continue growing?
