Zopa plays down risks for P2P lenders, stating less than 0.5% of borrowers default on loans
Zopa is a P2P lending business which last week celebrated having lent over &pound;1bn in total. This report outlines the potential risk to P2P investors, because once savers invest their money it goes directly to a borrower, making it a higher risk form of investment. However a Zopa exec says that fewer than 0.5 per cent of borrowers have defaulted on loans and that no saver has lost money. Furthermore, Zopa tries to lower risk by spreading lenders' money out across multiple loans in &pound;10 chunks, thus spreading the risk. 
The screen hanging from the wall at one end of the room flashes up in big bold type: £432,000.

It’s not yet 10am, but that’s the amount the staff sitting behind white plastic desks in this large, featureless room have handed out in loans already today.

By the end of the day, they’ll have loaned more than £2.1 million to around 300 people.

There’s a messy kitchen. Half-a-dozen workers in their 20s — all wearing jeans and trainers — stand around making toast.

peer-to-peer lenders are a relatively new part of the financial services industry, but in essence they work a bit like an old-fashioned building society

You’d barely believe this is home to one of Britain’s most dynamic financial companies, Zopa, and that this week the total it loaned passed £1 billion.

This savings and loans business has become a real threat to the big banks. Its customers can earn around 5 per cent interest — you’re lucky to get 1.5 per cent on the High Street.

Andy Caton, executive director at Yorkshire Building Society, says: ‘Zopa is part of an industry that is fast growing in popularity.

‘But it’s vital that people realise how different what they offer is to a typical savings account — there is no protection from the industry compensation scheme, and in extreme cases you could lose your money.’

Zopa is a peer-to-peer lender — a relatively new part of the financial services industry.

In essence, these firms work a bit like an old-fashioned building society. They get money from savers by offering them a rate of interest, and then use that cash to offer loans to borrowers who pay a rate of interest for it.

The difference is your savings go directly to a borrower (indeed, when Zopa started, customers were given a list so they could see who was borrowing from them and what the loan was for).

This makes it more high risk, and there is no formal safety net if things go wrong.

Zopa makes a profit by taking a cut of the difference between what savers earn and borrowers pay.

The whole industry sounds a bit too good to be true — and that is what is making consumers so wary.

Plus, there have been failures. A small firm called Quakle and another two called Big Carrots and Squirrl both went bust, leaving a few hundred customers with losses.

Relaxed dress code: Zopa founder Giles Andrews inside the company office

The biggest, most recent failure came last year when Yes-Secure shut down. The company had attracted more than half-a-billion savers’ cash after promising dazzling returns of up to 18 per cent.

The average investor lost almost 25 per cent of their money.

Zopa says fewer than 0.5 per cent of borrowers have defaulted on its loans and that no saver has lost any cash.

It has a contingency fund which has managed to cover any losses. It is proud of this record. A potential borrower’s credit information is rigorously checked, and they’re called to make sure the information they have provided stacks up.

They’ll ask about your salary, whether you have car finance, even what mobile phone you have — someone with an iPhone is likely to have a better credit score than any other phone.

Mat Gazeley, head of communications at Zopa, says: ‘People don’t want to default on their loans. They know it’s not some faceless institution who they would be leaving in the lurch, but an individual saver just like them.’

Savers who decide to invest cash are placed in a queue. They are matched up with loans as and when customers need them. It takes about three days for funds a be transferred to a customer — so this is no payday loan service.

Zopa tries to lower risk by spreading your money out across lots of different loans in little £10 chunks. This is in contrast to other firms who match each saver to a single borrower. It’s logistically easier, but does mean all your eggs are in one basket.

Despite the concerns, peer-to-peer saving and lending has found a market. The firms have loaned out more than £3.5 billion since 2005, accounting for around 3 per cent of the UK personal loans market.

The typical lender is male, 55 or over and has £6,000 invested. You can invest as little as £100, and a few customers have as much as £2 million.

Zopa, which employs around 100 staff and is based in Chancery Lane, London, is Europe’s biggest and oldest peer-to-peer firm. It certainly doesn’t feel anything like a bank, which hardly inspires you with a confidence in a financial institution.

These new start-ups know this. To try to enhance its reputation, the industry created its own regulator — the Peer-To-Peer Finance Association — to help maintain a standard and keep companies under scrutiny. And from this month, they will all be regulated by the City watchdog.

Another bold step to push peer-to-peer saving and lending into the mainstream will be the introduction of the Innovative Finance Isa, which will be launched next April.

This will mean the interest savers get on peer-to-peer will be tax-free — just like other Isa investments.

Mr Gazeley says: ‘We’d hope people would realise that those loans would be more risky — possibly to start-up businesses, which have a high rate of failure, or less creditworthy individuals.