Social Financing
Before you run out and begin thinking that social financing is going to help you pay your mortgage, understand that loans are small, but they can prove helpful in many ways. It is also not entirely without the use of a credit union.
How It Works
The basics of how it works is by connecting those who wish to invest in the “Zopa CD” with those who need to borrow for business or other needs. The intent is to keep rates low for borrowers, even adding other benefits to minimize the cost of borrowing, while giving good rates of return in a safe investment vehicle for the investors. Sounds like a win-win scenario, doesn’t it?
According to Zopa’s comparison, their best rates (those with great credit) are only 8.49% while investors can get 3.75% in the 1-year CD. Of course, they paint a prettier than reality picture, as they state banks personal loans are considerably higher (the lowest being 11.55%) and that bank CDs give only a average of 3.65%.
My Own Comparisons
Here are some of my own comparisons…
I have great credit (over 720) and my credit card only charges 7.99%, assuming I don’t pay it off each month. Why not just use your credit card since these rates can be fixed (mine is) on both a personal and business level? With good credit and reasonable qualifications, you can secure a credit card well over $10,000 dollars, even giving mileage or other benefit, that has a lower rate.
As for investing, CDs are OK, but there are numerous other options, not to mention having your money “tied up” is not overly appealing. Besides, the CD rates shown on Zopa only show an average of the top 10 banks. There are many banks that provide greater rates on their CDs as well.
That doesn’t mean Zopa will not be the best deal for you. Zopa’s real benefit comes in the form of members helping out, hence the social financing term. Investors can provide money for borrowers they chose to help by providing monthly payment if you will. That benefit lowers the cost of borrowing for loan recipients. So, if you want to borrow and feel that you can attract “investors”, you could end up borrowing at little or even no cost at all.
As with other financing and investing options, Zopa is likely worth looking into to meet your own needs. However, caution should be taken and deeper research are required before you make the final decision. I can see potential opportunities to for borrowers to keep costs minimal and for investors to assist those borrowers while receiving a fairly decent rate of return.
