New ISA from Zopa promises to pay 6.1% interest – find out if you can apply…

Latest figures show that the average interest on a cash ISA is just 0.4% – so a new ISA paying 6.1% is bound to make people sit up and take notice – say hello to Zopa’s new innovative finance ISA.

It’s not every day that a new ISA is released that pays you so much interest on your savings, so what is the catch? Here we look at who can apply for it, how it works and whether your money is safe.

Who are Zopa?

Zopa, who launched in 2005, are the first company to directly match people looking for a loan with people looking to invest – lending the money from investors to borrowers – known as “peer-to-peer” lending.

Since their launch they have helped 76,000 investors lend £2.4billion to people who have applied for a loan through Zopa – giving investors consistent returns despite the bleak economic landscape of the last decade. Due to their success many other companies have followed their business model.

What is the new ISA deal?

Customers can put up to £20,000 into the ISA, choosing between two rates:

  • Core – paying 3.9%
  • Plus – paying 6.1%

The rates are possible as Zopa isn’t like a traditional bank – they don’t lend your money to businesses or invest it in the markets. Instead, they let you hand the money to the borrower, getting better rates as you effectively cut out the middle man. (Zopa make their money through small fees for arranging and servicing the loans.)

Is it safe to invest this way?

It’s not quite as safe as putting money into a traditional savings account – but the risks aren’t as high as you may think they are.

Instead of taking your money, then lending it out to businesses and people – or investing it in the markets, Zopa takes your investment and shares it across a number of borrowers to minimise risk for the lender. This means that if one borrower defaults then they will not have had more than 1% of your investment to begin with, thus managing risk to lenders effectively. All borrowers are also checked for eligibility before lending.

The two rates offered also have different levels of risk – the 6.1% rate indicates a higher risk option.

On average, fewer than 2% default, and this year only 0.08% of loans have defaulted, meaning that lots of lenders have not actually been affected at all – as their money has been lent to multiple borrowers.

Unfortunately, there is a risk involved with this type of lending. As Zopa is not a traditional banking institution, you will sacrifice the protection you normally get from the Financial Services Compensation Scheme (FSCS). Another risk is that past performance isn’t a guarantee of future results – Zopa has been performing well, but with all investment comes risk.

Who can invest in the ISA?

The ISA is launching slowly – on June 15 they let existing investors open an ISA, and in July are letting them move their investments into their ISA. In August, they will be able to move their money from other ISAs into their Zopa ISA.

Once this process is complete Zopa will open the ISA to new investors – however as Zopa need to find a borrower for every £1 invested, there is a case of demand needing to meet supply.

If you want to open an ISA with Zopa, you will need to be 18, a UK resident and able to invest a minimum of £1,000.

Can I get this type of deal elsewhere?

Yes – there are other peer-to-peer lenders who offer ISAs, including Landbay and Lendingworks who currently have good deals available (3.75% and 3.3/4.8% respectively.)

Funding Circle, who lend money to small businesses and RateSetter are also developing brilliant offers of up to 7.2% estimated returns.

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