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WOULD YOU HAND OVER £25,000 TO STRANGERS?

Christmas. It's here again - and it's expensive. We ran up debts of more than £11 billion on credit cards in December last year and nearly half of borrowers are thought still to be paying off last year's Christmas hangover of loans, credit card and bank debts. But this year there is a source of cheaper credit as a novel idea in borrowing attracts growing attention.

Zopa, the world's first lending aSnd borrowing exchange, was launched in March. For people who want to borrow or lend, it provides an online alternative to dealing with the big banks or building societies. Zopa - zone of possible agreement - says it is the overlap between one person's bottom line (the lowest they're prepared to accept for something) and another person's top line (the most they're prepared to give for something). The idea comes from the same financial services team that set up internet bank Egg and is funded by American investment firm Benchmark Capital, which backed eBay when it set up. Zopa puts people who want to borrow money in touch with people who want to lend it. Lenders pay nothing to use the exchange, which is open only to individuals. They can put up from £500 to £25,000, but only in parcels of £200 to any one person.

If a borrower defaults, the lender could lose the £200. James Alexander, co-founder of Zopa, says not a single borrower has defaulted on repayments. Zopa charges borrowers one per cent of the sum borrowed, though it has been waived for those taking out a loan before December 31. It also benefits from the sale of lucrative payment protection insurance. Zopa rates are lower for borrowers and higher for lenders because there is no middleman. Almost 40,000 people have logged on to zopa.com as borrowers or lenders, using eccentric e-mail user names such as Headhurts, Milkmongoose and CowgirlJo, and the figure is growing by 50 per cent each month. There are now plans for a launch in America next year. Loans can be for as little as £1,000 or as much as £25,000, though the average sum is £5,000. Borrowers are divided into two groups, depending on their credit rating.

Those who have always paid on time and have not been in arrears are rated A, while B-rated borrowers may have had the occasional late payment. Alexander says A-rated members could borrow £5,000 over three years at 4.9 per cent while B-rated borrowers might pay 8.5 per cent. The best loan rates on the High Street, which are not available to everyone, are from about six per cent for a three-year loan. The rate of interest charged through Zopa also varies according to the amount borrowed and the repayment period. The shorter the term and the smaller the amount borrowed, the lower the rate. And a big advantage is that loans arranged through Zopa may be repaid in full at any time without penalty.

 In contrast, most banks and building societies charge. On the other side of the operation, the rates also have to be keen to attract lenders. They receive an average of 7.3 per cent on their stake before tax, according to Zopa. Top-paying High Street savings accounts pay about five per cent. Zopa will allow people to join as members only if they earn at least £25,000 a year and have a reasonable credit record. To cut the risk of lenders losing any of their money, each loan is spread between at least 50 borrowers. This limits lenders' losses if a borrower defaults on repayments. Alexander says: 'One reason for the non-existent default rate is that we have been cautious and strict about who we lend to, and we are underwriting very carefully. 'However, we believe that people may also be more inclined to repay individuals than banks, or, at least be more reluctant to default when they know there is a real person that it will affect personally.' Rupert Angel, who runs a graduate training company, was looking for a loan, partly to fund his business but also for personal reasons, when a friend told him about Zopa. Rupert, 35, who lives with his wife Alexandra, 36, and three sons in Shepherd's Bush, west London, says: 'I was surprised how competitive the rates were.

The other key attraction is that I can repay the loan early without penalty.' He borrowed £5,000 at 6.15 per cent over one year without insurance, though he could probably have found a cheaper deal. Rupert is so impressed with Zopa that he says he would even consider becoming a lender. 'So far, Zopa has done exactly what it says on the tin and I would definitely use it again - both to borrow and to lend,' he says. Michael Wolff, 72, who runs his own brand consultancy, was attracted by the personal aspect of Zopa. He borrowed £5,000 six months ago at just over six per cent to help fund work on his house and garden in Islington, north London. 'Though I bank with Barclays, increasingly the service has been impersonal and everything seems to be done through call centres,' he says. 'I really liked the personal touch offered by Zopa and the interest rates seemed competitive.

'For me, the selling point was the fact that it is so civilised and people can manage their finances adult-to-adult rather than relying on banks.' Borrowers may have little to risk with Zopa's innovative approach - but what about the lenders who are stumping up the cash? Simon Clarke, 32, a management consultant from Wargrave, Berkshire, decided to lend £1,000 in June after coming across the Zopa website. Simon says he was attracted initially by the high rate of interest on offer. He earns about 7.5 per cent on the £1,000 he lent last June and has already had £300 back. 'The potential interest rates available to lenders were competitive and I thought it was worth putting in a trial loan of £1,000,' he says. 'I'll probably lend more in January when I get a bonus. So far, my money has been lent to different people, ranging from someone buying a motorbike to someone who wanted to buy a caravan. 'I also lent money to a man of 55 who wanted to put down a deposit on a house, someone preparing for their wedding and a borrower aged 23 who wanted a loan to consolidate his debts.' Nor was Simon worried about losing his money. 'I checked out Zopa carefully and there is a slight risk, but I felt that it was well managed,' he says.