A couple of weeks ago, I went to Finovate Start-up to learn whatever I could from various financial company start-ups and report back to you. I hoped to find three or four gems in the 40 companies that presented. One of the companies that I was least interested in was Zopa. In the UK, Zopa is a very successful peer-to-peer lending company. This lead to their widely anticipated US release. When the product was introduced, critics universally panned the service. For the investor, Zopa is basically a CD – you get a guaranteed fixed rate of return. For the borrower, you get a loan without ever having to deal directly with a bank. There simply didn’t see anything “Finovative” about the company.
At Finovate, they reinvented their reputation. By the end, they had one the coveted award of Best of Show. I was stunned. How did they do it? Borrowers can pay negative interest rates.
Let me repeat that, because it took me a bit to wrap my head around it… you can pay negative interest rates. How can that happen? When someone invests in a Zopa CD, they choose a borrower to help. This “help” reduces the rate that the borrower has to pay back. Zopa showed a couple of examples where borrowers are paying negative interest due to all the help they’ve received.
So if the borrower can make negative interest, the investor must be getting the short end of the stick right? Not exactly. A Zopa CD pays 3.75%, which compares well with the US Avg (2.90%) as well as the Top 10 US Bank CDs (3.65%) (source: Bankrate.com, 24-Mar-2008). The Zopa CD is insured up to $100,000, so it’s a steady investment if you like the returns on a CD.
I didn’t need a loan, so why did I get one? I have often written about peer-to-peer lending. I created the Carnival of P2P Lending. I felt that it would be interesting to be on the borrowing side. Most importantly though, I wanted to experiment to see if I could achieve a negative interest rate. If I can’t achieve a negative interest rate through connections like you, the odds are very long against the average Joe doing it. So the results of this experiment lie in the Lazy Man community… If you want to help me achieve a negative interest rate simply visit my Zopa profile and click on the Help Me Now button. I put up my favorite YouTube clip and a couple of pictures on that profile for your enjoyment.
Before my wife reads this and I get a nasty phone call… Honey, I only took a $1000 loan – the lowest amount possible. I got the lowest possible interest rate 8.49%. This means that if I keep the loan for a full year, I’ll pay around $85 to run this experiment. If I don’t receive significant help in 6 months, I’ll probably cancel the experiment and declare the negative interest rate hype and not something that one can expect. I’ll also keep the money that I borrowed in an interest bearing account, which means that it will cost less than $85 in total. With our net worth, income, and spending, this doesn’t really amount to much. One could even claim that it was worth it to realize that I was able to get the best interest rate that Zopa has to offer despite being self-employed.
Good luck with your loan. I hope you can pull off a great interest rate.
For lenders, this is a great way to help a friend or family member with a purchase while not having to co-sign for them.
By the way, I wrote some time ago about borrowers paying negative interest rates at Zopa. In the examples I found, a borrower was paying negative 24% interest. Absolutely amazing!
Hehe, you sound pretty worried your wife might not think its as good as an idea as you do. I like how you told her about it on the internet and didn’t ask first. You are right though it is a pretty small risk. I think experiments are usually worth it though. You are paying for the knowledge(and possibly earning for it).
What exactly happens in a situation where you do actually reach paying negative interest? I get that it can eliminate your payment .. but once you go into the negative, what exactly happens with your Zopa account? Once the loan is paid off, likely early if there is more help coming in, do you end up with a chunk of money?
I get it, but I don’t get it.
Tnx, and good luck!
In an ideal situation, the borrower wouldn’t have to pay back the loan because of the help they have… I don’t think you can get more help than you owe each month.
Very interesting. It’s definitely not a high risk situation, and I’m sure it will be fun tracking it and making this work. Certainly not enough money to get rich from, but fun nonetheless.
I look forward to reading about it. It sounds like a strange system. I hope that besides your experiment they also release numbers on how many borrowers actually experienced negative interest and the average interest reduction through help.
@ Mrs. Micah: Several months ago, the average help was $22 per loan. To answer your question, I tried looking for the number on the website and could not locate the current average help.
I am a lender on Zopa (and on Prosper). I tried to identify borrowers on Zopa who live in my area who appeared to genuinely need my help though the limited information makes that difficult. So I identified early 20’s who looked like they could use a break.
So the problem with your experiment is you seem to be doing OK for yourself and so why should I reduce my interest to help you?
I don’t mean that pejoratively but as a question for discussion. Do you intend this loan to be a form of payment for received value from the Lazy Man blog?
A person P2P lends for basically two potential reasons: He feels he can get a better return than other options or as some form of social (i.e. charitable) lending (or a combination).
Zopa by its structure is heavily weighted towards social lending. It appeals to be me in that I can help others with foregone interest rather than actual cash. As I said, you appear to be doing OK for yourself, why should I pick your Zopa loan versus one who appears to need the help?
Good points, VMH… I talked with CEO (of the worldwide company, not just the US version of Zopa) and he implied that was most people get significant help. I don’t believe that to really be the case. I think the people that the editors highlight are getting the help.
So maybe I should have put up a sob story to appear to have the need for help? That really doesn’t seem to be reliable to me.
Good luck with this experiment and let me know how it goes….I was always interested in the new P2P lending networks but hesitated to jump in. (i.e. Prosper)…
The wife paragraph was hilarious! Loved it. If I ever did something like this I would need two such paragraphs!
Correct me if I’m wrong, but the help for borrowers comes from CD holders pledging part of the CD interest to the borrower. So they don’t get the full 3.75% because part of it is going to reduce the interest on the borrower’s loan.
Sad to say I don’t think you’ll see negative interest. I’m figuring the people who are willing to forgo interest on a CD are looking for deserving people, and a well off person doing an experiment isn’t as important a need as someone who needs the money for school or a car to get to work or something.
I believe that you get the full 3.75% rate and that Zopa gives the interest from the difference that they make from the 8.5% I’m giving them. This is the way their CEO explained it to me. Thus it really is win-win… if you are interested in a 3.75% CD.
Looking through their help files, it seems that if you get the 3.75% CD, you are giving some help to a borrower, but you can give more by lowering the interest rate on your CD.
Are you in USA? The UK site does not seem anything like what you describe. Here all applicants for loans receive a proffessional credit-rating and get offered loans of up to £15k at interest rates according to their rating.
There is also ‘listings’ where borrowers describe themselves etc. and lenders choose the amount and interest rate they offer.There is no ‘negative interest rate’. It is all very civilised. We do not have many non-government scams here. Regards, jallan.
Yeah, I was in the USA and our laws required Zopa to do an entirely different model here. It didn’t work and Zopa had to shut down.
Yes Jalan, the UK site doesn’t operate like this USA one. We have a great credit rating system which works well and allows the borrowers to achieve loans at well below the rates the banks and other(disreputable?) loans companies charge. In that, the aims of myself and others who want to restore some parity to those wanting loans and help this country back onto its feet, are achieved.