26 February 2008

Banking 2.0

I have recently become intrigued by the newish phenomenon of P2P lending over the internet. Irritatingly, I recall reading an article all about it but now cannot locate it - I am convinced it was in the Spectator, but it appears not.

The principle is simple - you agree to lend money at a particular rate, and then the website lends it out to borrowers who want the money at that rate. The trick is that the website cleverly splits your money into parcels as small as £10, so if one lender defaults, the loss is not major. The downside is that whilst the returns are greater than traditional bank interest, your money is tied up for the lifetime of the loan (up to 5 years), although for some people, this might be a good thing.

I have signed up on Zopa.com and have experimented by lending a measley £100. You can either lend in the general market (where Zopa does all the work once you have set the criteria) or you can take part in the Dutch auction and bid to lend money to people who are on the listings section. In the US, a rival site, Prosper.com, has a vibrant listings section, but on Zopa it is quite small and many of the people on there seem to be having a laugh. For instance, people borrowing a couple of thousand pounds but claiming that their income exceeds their expenditure by £500 or more each month, which in my mind does not really stack up. I have offered £20 to a lister, but I think I will steer clear as the borrowers are obviously hoping the "personal touch" seep through and the lenders will allow their heart to rule instead of their head, and I have no intention of becoming a one man Northern Rock (although I have just got 8.5% on my £20 for 3 years, which is not bad, let's see how it goes)

If you are interested in Zopa, please click on the link in the side bar and sign up so that we both earn £30 or you can sign up here.

Of course, micro lending is also used as a development tool, and if you are not worried about getting a return and just want to do good - I recommend you check out www.kiva.org.

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