I’ve just been checking out my Zopa savings account, where I’ve noticed interest rates are going up. I only ever lend to A and A* borrowers (people with great or better than great credit records) and the rate Zopa is quoting me as competitive is much higher than usual.

In fact, in the A*, 24-month market, I seem to be in the zone with an interest rate of 10.5%, which Zopa estimates will give me 9.5% after bad debt.

That 9.5% is almost 50% more interest than on the best savings accounts available from banks at the moment.

I’m gob-smacked.

• Previously Zopa’s edge on normal savings accounts has been more 1-2% above the High Street banks.
• The Bank of England is cutting interest rates, so this is a chance to ‘lock in’ a higher rate.
• That 9.5% is close to my expected returns from the supposedly much riskier stock market.

So should peer-to-peer Zopa lenders be filling their boots?

A quick Zopa primer

I’ve been meaning for ages to write up my experiences with Zopa, but a quick primer will have to suffice for now.

Zopa is a peer-to-peer lending site that’s been going in the UK for about three years, and recently launched in the US, Japan and Italy. It’s completely legitimate in terms of its business (although some criticize its business model!) It’s been covered by both the BBC and the FT.

Set up by experienced bankers who created Egg in the UK, the best analogy is it’s sort of like an eBay for money. As a lender you offer loans to members, while other members borrow money. You get access to the same credit checking the big banks use (or don’t use), and there’s (theoretically) all manner of checks and balances built-in to enable you to see what kind of rate you’re getting.

The big difference between putting money into Zopa and a normal savings account is that you can lose your money with Zopa.

There are safeguards against this – you might choose to only lend, for example, £10 to each borrower, and bad debt is taken into account in the expected returns – but it’s still a crucial difference. On the other hand, I’ve not yet had a bad debt, and nor has a good friend who has been a lender with Zopa for over two years.

I still plan to write a long post about Zopa soon, as it’s really fascinating. If you want to know more before reading on, check out that BBC story on Zopa.

So, should I lend money like crazy at 9.5%?

Clearly, the credit crunch is having an effect on Zopa’s peer-to-peer lending market, either by:

• Increasing the number of Zopa borrowers, and so decreasing the pressure for lenders to compete via reducing rates.
• Reducing the number of lenders, and so reducing the range of offers for borrowers to choose from.
• Making lenders nervous, so we’re all raising our rates.

Plus I see a fourth, really unpleasant possibility:

• More lower-quality (or even dishonest) borrowers are coming to Zopa.

Which is it? I wish I knew. If I could be certain those A* borrowers wouldn’t default in droves in the next 24 months, I’d take a 9.5% return like a shot. Certainly, if a big High Street bank was offering that interest rate, I’d sell down some of my shares to take that as a guaranteed return.

But Zopa lending is not guaranteed, and that’s a very big but indeed.

I’d say the likeliest cause of the rate spike is a combination of all of the factors I mentioned above. Rising rates in a system like Zopa make sense even if rates are falling elsewhere, because lenders like me always have the opportunity to just stick our money in a bank account instead if we’re unsettled, and will demand more return for taking the risk. And if Wall Street and the City is nervous about lending money because of rising bad debts, we should be, too.

On the other hand, my A* borrowers are (theoretically) the creme de la creme of customers. You can lend to sub-prime borrowers at higher rates on Zopa, but I don’t. So the risk of a mass default for me should be small.

The biggest issue for me is Zopa has not yet been tested in anger. We haven’t yet seen how individual borrowers will behave in a peer-to-peer system if money really becomes tight. With some economists predicting a 1980s-style recession in every way except the shoulder pads, that’s a very real risk.

On balance, I’m going to increase my lending a little, but not go crazy. I originally explored Zopa as an experiment, and it’d be terrible to discover that I’m the unfortunate guinea pig should the experiment turn sour.

If you want to know more, visit the Zopa website, or read this FT article. (Zopa links tell the site I sent you, which at the time of writing can give us both £30 if you do choose to lend or borrow. Which is nice.).

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We can’t wish away the credit crisis. However sensible you or I have been with our investments, borrowing and spending, we can’t wind back the clock and stop bankers throwing money at poor people who’ll never be able to pay it back, and who are often now paying a far higher price – repossession, dislocation, or even bankruptcy.

The bankers did it, everyone got cold feet, and now we all have to live with the consequences.

However rather than putting on The Smiths, pouring myself a large gin and tonic, and turning to Sylvia Plath, I thought it’d be more useful to assemble a checklist to help you avoid suffering too much fallout from this banker bungling. Who knows, you might even come out of the credit crunch richer! Personally, I’ll be happy with older and wiser – and not much poorer…

Today I look at personal finances. Tomorrow I’ll offer quick checks on investment, your income and more, so please be sure to subscribe to my feed.

1. Get out of debt

Because of the credit crunch, money is becoming more expensive.

I’ve written before about why you must get out of debt. But with the credit crunch being described as a great ‘deleveraging’ (in human speak, banks are reluctant to make new loans, and may even be calling them in), borrowing money instead of saving to buy things is getting even more expensive.

What it means for us

• If you’re already in debt, I’m not saying your bank is going to call you up tomorrow and demand all it’s money back. Rather, the climate is turning against borrowers for the first time in years.
• Banks are increasing loan rates where they can.
• They are less willing to enable customers to shuffle debt using cheap balance transfers.
• They will look much more carefully at impaired credit records, which will be a factor if you’ve been missing payments.

Action plan

Get out of debt, ASAP. Normally blogs work best when writers tell you personal stories, but I hate debt with a passion and have avoided it ever since I left college. If you’re struggling with debt, one of several good blogs on the subject is Blogging Away Debt. (But please comeback soon!)

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Am I the only investor sick of hearing financial industry insiders bleating that the US Federal Reserve must do more to ease their pain? Am I the only stock market investor who would like to see the world’s major indices fall hard to purge and punish the companies – and polices – that set the stage for the credit crunch?

Apologies to my regular readers for what really will sound like a rant. But responsible investing for the long-term by implication means taking an interest in – and having faith that – the market system will not destroy itself during your lifetime through greed and incompetence.

This current debacle is the most serious threat to Western capitalism since the Berlin Wall came down. So please, let me explain why I’m angry.

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Space operas are exciting, with droids, blasters and galaxies far, far, away. Financial advice is often dull, and focussed on doing without, dying, and matters down, down to Earth. Is it any wonder millions more of us watched the lamentable Episode 1: Phantom Menace than will ever read The Millionaire Next Door?

But what if Star Wars could teach us something about personal finance? Well, read on to discover what the classic trilogy’s major characters know about money.

(Note: I’ve ignored all the characters from the ‘Trilogy of Shame’, even the good one(s). If you know where Jah Jah Binks or Count Dooku would stash their cash, I’d love to read your thoughts in the comments below).

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While many people have made a fortune out of property in the UK over the past few years, some have lost a packet – even as prices continued to rise. These are the so-called ‘Sell-to-Rent’ brigade, who attempt to time the peaks and troughs of the house price cycle by selling their home at the top and then buying after the presumed house price crash.

With prices finally wobbling and the credit crunch making terrible headlines every day, now looks a great time to sell-to-rent. Flog your home for £350,000 and you might be able to buy it back in five years for £250,000!

Happy times? Perhaps, but remember:

• 2005 looked a good time, too (prices dipped slightly when interest rates began to rise)
• 2003 also looked a promising time to sell (the onset of the second Gulf War led to a plunging stock market and global gloom)
• 2001 saw the earliest sell-to-renters make themselves known (this was around the time that London property first passed through its long-term price-to-earnings average, which has historically been a good barometer as to the future direction of house prices. It’s proven very unreliable in this era of low interest rates)

Now London property blog The Rat and Mouse notes that the sell-to-renters are back, going on to warn that:

Few financial decisions are as risky, or real-world calculations as tricky… taking in the cost of storage, rents (which can go up and down), the costs of selling and buying, the value of time, inconvenience and risk, all multiplied by however long it might take for prices to start to drop and then assuming it’s possible to buy in just before everybody else does. The chances of getting all this right are low.

Too right. I’ve not sold-to-rent, but I hold my hands up as a would-be first-time buyer who has sat out the property market for several years now, most recently believing that property prices are unjustifiable if you compare mortgage costs with rent.

It’s been a costly error. You gamble with the Great British love of property at your peril.

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Catching up with some of my favourite financial blogs (no, Monevator.com is not an island!), I’ve noticed a sour note on those that follow the net worth of the author (e.g. My 1st Million at 33 and Accumulating Money).

I admire these writers for putting their cojones on the line so publicly. My thoughts certainly shouldn’t be construed as a criticism of their efforts.

However, there’s a reason why I don’t track my personal net worth on Monevator.com, and it’s being demonstrated by the depressed tone that many personal finance blogs as the market falls.

The trouble with tracking your net worth

When things are going well, as they did for several years up until the end of the 2007, blogs tracking personal net worth seem heroic. Booming stock markets and rising property prices see an ambitious target drawing nearer month by month. £500,000 no longer seems a distant dream, and £1million looks feasible.

However when markets or property prices fall, progress towards your goal is cut short. And there’s a particular problem when your goal is a net worth figure:

• You cannot control the price the market puts on your stocks or your home

If you’re a financial blogger tracking your net worth, you may be doing just what you did last month or last year – saving hard, earning well, and giving us a ringside seat – but suddenly the results don’t look so good. This can be dispiriting, and I’d be concerned it could turn me off investing altogether.

My approach: focus on goals and targets I can control

Goals are crucial, but they have to be attainable for you to keep working towards them. Attainable means controllable. Have a target of a million in the back of your mind if you want (I do occasionally add up the value of all my investments), but in the meantime focus on stuff that you can achieve.

Controllable goals include:

• Saving 15% of your salary
• Reducing your monthly shopping bill by 20%
• Doubling your income over the next five years

These are all financial goals you have some ability to move towards achieving - it’s up to you to save more, find cheaper groceries, or boost your career. The price of groceries may rise or fall, or you may find it hard to get a raise, but that’s nothing compared to being at the mercy of uncontrollable fluctuations in stock markets.

With stocks and shares, we hope our investments will go up over time, but in the short-term they can plunge, as this bear market has repeatedly proved. It’s out of our control.

Good longer-term targets might be:

• A monthly income target from your investments. (I recently wrote how replacing your salary with investment income could be a good long-term goal). Income from a basket of dividend paying blue chip shares and bonds is much steadier than the same portfolio’s capital value
• Maxing out your tax-saving investment plans each year. (For instance, I think in the UK anyone with sufficient earnings should try to use their annual £7,000 ISA allowance.)

Create your own targets that suit your situation, but I’d suggest concentrating on things you can do, like saving more, not things that will be done to you, like the particular return from the markets in any year. Like this you focus on what’s achievable by you now, not on how generous the stock market may be feeling.

Ironically, it’s a better time to buy shares for income than a year ago. You can get 10%-25% more dividend income from a basket of leading shares than at the peak of summer 2007. In the long-term, markets (shares and property) will bounce back, and this bear market will likely be seen as a great buying opportunity rather than a time for apocalyptic hand-ringing.

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Thanks to the recent stock market volatility, investors are increasingly turning to gold, which is traditionally a safe haven in troubled times. This article introduces Bullion Vault, a company that enables you to buy and securely store small amounts of the highest-grade gold, which the company claims offers unique advantages for small investors buying gold.

Why are investors buying gold?

Sales of gold via exchange traded instruments have soared recently, with funds that invest in gold mining shares such as Merrill Lynch’s Gold and General Investment Trust have produced returns of around 500% over the past five years.

In 1999 gold was trading at around $275 per ounce, which was when Gordon Brown, the UK’s then Chancellor of the Exchequer, decided to sell half the nation’s store, further depressing the price. Gold has since rallied very strongly. Having broken through the $900 per ounce mark in the past few months, it’s threatening to sail through $1,000 an ounce in 2008. (Thanks a bunch, Gordon!)

Fans of gold (so-called ‘gold bugs’) make the following case for investing in the yellow metal:

• As a real asset, gold is a hedge against inflation.
• Demand for physical gold is increasing, with new money from India and China said to be particularly keen on gold. (Indian farmers traditionally buy gold jewelry as a store of value.)
• Production difficulties are constraining supply. Power supply problems in South Africa are the current bugbear, but exhausted mines, political instability and environmental concerns perennially hamper production.
• Most gold in the world has probably already been mined.
• Even though gold has increased nearly four-fold in dollar terms since its lows in 1999, the previous high reached in 1980 would be around $2,000 today, adjusting for inflation.
• China and certain other central banks are now increasing their gold reserves.
• In a world of ‘paper’ or ‘fiat’ currencies, gold is the ultimate wealth preservation tool. The US can print all the paper money it wants, but it can’t conjure up gold.

There are also convincing arguments against gold

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After five months of tough talk, roundabout action and general chicken-sans-headery, the Government has ‘decided’ to nationalise Northern Rock. (Yes, in the same way that I ‘decided’ to start losing my hair).

The authorities responsible for dealing with the Northern Rock’s collapse have been making poor precedent-setting decisions since day one of this pantomime. None are so significant as nationalisation, however.

As Robert Peston says on his BBC blog, nationalisation is supposed to be the preserve of the doomed industrial dinosaur industries of yesteryear, not our go-go financial services. It’d be scarcely more shocking if Wall Street’s bankers stopped illicitly smoking Cuban cigars and started getting behind Fidel Castro’s ideas on redistribution. Harry Enfield’s Loadsamoney of the 1980s is morphing into 2008’s Tonnesadebt before our very eyes.

Unsettling consequences for UK tax-payers of Northern Rock’s nationalisation:

• We’ve each got between £2,000 and £3,500* of exposure to Northern Rock’s mortgage book (depending on who you believe and how the final count is tallied)
• We’ve also got about £100 billion in assets (the same loans will keep churning out cash, provided mortgages don’t default)
• We’ve thus now all got a vested interest in the housing market not collapsing

Yes, even bears on UK housing like myself have now become mortgage lenders at the peak of the UK’s biggest ever housing bubble. Some days you wish you hadn’t gotten out of bed.

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The actor from Lock, Stock (and Press Gang, for a certain generation) has given The Telegraph a cautionary tale on the reckless spending and debt-mania that saw him go bankrupt at 31:

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