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Give your CD to total strangers? 6 U.S. Credit Unions say, "yes!"
This entry was posted on 12/11/2007 1:49 PM and is filed under Deposits,Credit Unions,Technology,Lending.
December 11, 2007: The
Credit Union movement may have taken an evolutionary step this past week when
six U.S. credit unions became part of an
international social lending network.
Through these six credit unions, anyone in the U.S. may help borrowers without the need for
a loan officer or a review committee.
This
“peer-to-peer” lending grew from the online social networking popularized by
MySpace and Facebook, which turns total strangers into Internet friends. The credit unions are relying upon a United
Kingdom-based lender, Zopa Ltd, to
facilitate bringing borrower-peers and investor-peers together.
The concept is
simple: To get help with a loan from an investor-peer requires first convincing
that peer of your need. That’s done with a profile, similar to those found on
MySpace. Peers may add pictures and
video clips to their profiles. If your plea for a loan appeals to an investor,
you’ll get your loan and possibly online friends as well.
Peer-to-peer
lenders market themselves to borrowers as cheaper, easier alternatives to bank
loans and credit cards. About $100
million of these peer-to-peer loans will be issued this year, with new ones
expected to jump to $1 billion in 2010 and $9 billion by 2017, according to Online Banking Report.
This is Zopa’s
first venture into the U.S.
Competitors include Prosper Marketplace’s Prosper.com and Lending Club
Corp., which started on Facebook but now is also available at www.lendingclub.com/.
What makes Zopa
unique within the U.S. is it’s partnership with six credit
unions, who retain the investor peers’ funds within a share certificate of
deposit. This means that investors
receive guaranteed returns and federal insurance backing even if a
borrower-peer defaults.
Borrowers
obtain unsecured personal Zopa Loans, issued by one of the participating credit unions.
Current rates are about 8.75%. The cost
of the loan to the borrower can be reduced by being selected by an investor who
opens a Zopa CD through any one of the credit unions. The investor decides which borrower will
receive funding, and how much help the borrower may receive.
Investors are required
to pick at least one borrower to help. If the investor wants to help more than
one person, then the investor must deposit more than the minimum deposit and
accept a rate lower than the maximum available yield. The lower the CD rate, the more help the
investor may provide. Zopa offers CDs in one-year terms, with a current yield ranging
up to 5.1%. The penalty for early withdrawal is 90 days of interest.
Zopa sets
minimum lending amounts for each CD, plus a general formula to calculate the
amount of aid you can offer a borrower. For
a $500 CD deposit earning the maximum yield, the investor can help underwrite
$0.04 of a loan each month. If the
investor is willing to accept a lower yield, for example .4% below the maximum,
the amount of help could go up to $0.21 per month.
To buy a Zopa CD or to take out a Zopa loan, investors must also become a
member of one of Zopa's partner credit unions. The participating credit unions partnering
with Zopa include Addison Avenue FCU, Affinity Plus FCU, First Tech CU, Forum CU, Provident
CU, USA FCU. Most of these credit
unions mention the Zopa partnership on their websites. Zopa, in turn, promotes the credit unions on
its website.
One key question concerns the
credit unions’ field of membership restrictions. Four of the six credit unions
working with Zopa offer membership to anyone in the United States as long as the prospective
member joins one of the supported organizations. Zopa offers links to
membership applications for each of the credit unions.
For instance, anyone can join Addison Avenue Credit Union provided
they pay $5/yr to join the Financial Fitness Association. To simplify
the process further, Zopa covers the first year of association dues.
To join
Affinity Plus FCU, a one-time donation of $25 to the Affinity Plus Foundation
is required. Join the Sierra Club
($25/year), and you can be a member of Provident CU.
Zopa makes money primarily by servicing
the Zopa Loans and Zopa CDs for the partner credit unions. Peers avoid fees for the service as long as payment
processing is electronic and they remain current on all loan payments.
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