Beating Broke

Lending Club Return Update 2Q13

August 5, 2013 By Shane Ede 5 Comments

Lending Club is a peer-to-peer lending service. People (like you and me) sign up for their site, and list a loan to be funded by investors (like you and me). I like to think of it as replacing the bank in a loan with me. (Except I’m not “too big to fail”.) Of course, with that comes the same risks that the bank assumes when it issues a loan. There’s a risk of late payments, missed payments, and default and it’s associated collection activities. Luckily, Lending Club and Prosper (another p2p lending site) take care of most of the paperwork for the lenders (and borrowers). This post is the second quarter update on my Lending Club account, and the return I’m getting on my money.

If you’d like to catch up a little, here’s links to the last few quarterly updates. (1Q13, 4Q12, 3Q12)

First Lending Club Default

I’ve been mentioning in the last several updates how lucky I’ve been that I haven’t had a loan go into default yet. Well, that streak ended recently. I knew it was only a matter of time before one of the notes defaulted, and one has. Luckily, the loan that defaulted was a small one, and my portfolio has grown enough that the value of the default didn’t really affect the account too much. The value of the defaulted loan is about 1% of my Lending Club portfolio.

There’s also a loan that is in the 31-120 days late category, that has the possibility of going to default, but at this point, the borrower is making attempts to pay the loan. The reason it’s still in the late category at all is because the most recent payment was only a partial payment. This loan is a larger loan than the defaulted one, so I may have to consider taking the loss on it and selling it at a discount to get it off my books.

Diligent Reinvestment

One of the things that I like most about Lending Club, and p2p lending as a whole, is that you get a relatively high churn on your money. It’s not a buy-and-hold scenario, per se. Yes, you invest in a note with the expectation of holding that note until it is fully paid off, but, as the payments come in monthly, that money is available for reinvestment. In my 1Q13 update, I mentioned that I’d been a bit lazy in my reinvestment of those funds. I was slightly better with that in the second quarter, and was able to keep most of the money pretty actively invested.

[Tweet “I knew it was only a matter of time before one of the notes defaulted, and one has.”]

Passive Income from Lending Club

Many people (myself included) call p2p investing a form of passive income. While not strictly meeting the criteria in that it does still require some activity on the investors part, it’s pretty close. Maybe we need to start defining passive income in terms of it’s passivity? Something like levels. Each level is achieved by it’s decile of passivity. For instance, I think p2p investing could be somewhere around 90-95% passive. That would make it a Level 9 Passive Income source. With about 15 minutes of work a month, I’ve earned almost $60 in interest payments as of the end of June of 2013. Last year, with the same amount of work, I earned $75.37 in interest payments. If I had significantly more money, that amount would be larger, but I think that the time spent each month to earn it would be a bit larger as well. Still, a pretty close to passive means of making some money.

Lending Club Return Update

We’ve talked about most of the rest of the account, but the title did say that it was a return update, right? Yes. In my 1Q13 update, I mentioned that the rate of return then was being shown as 14.63%. As of 8/3/13, it’s being displayed as 14.08%. The combination of the defaulted loan, and the payoff of a couple of higher interest paying notes is bringing the rate down. I’ve been happy with the return I’ve been getting, but I truly think that a more reasonable expectation of return is somewhere in the 10-13% range. I’ll take the 14%+ returns I’ve been getting though.

Click here to learn more about how I select my Lending Club investments.

Overall, I’ve been really happy with my results at Lending Club. And, with the p2p lending industry as a whole issuing over 200 Million in loans in July, it would appear that there are plenty of other happy users too.

Have you gotten your feet wet in p2p lending? Why or why not?

Are You a Financial Pessimist?

July 29, 2013 By MelissaB 8 Comments

A few weeks ago, I shared that we’re all financial optimists, and it’s hurting our bottom line. Like many, I’m guilty of thinking that my experience is common of most people. Because I’m a financial optimist, I assume many people are, too.

How Financial Optimism Affects Our Finances

We’re digging our way out of some serious debt, and part of why we have that debt is because of financial optimism.

Four years ago, we took out student loan debt so my husband could finish his Ph.D. We knew once he finished the long haul of finishing the degree and then completing a two to three year post-doc that finally he would begin to make a good salary. That’s still true today, but we’re slowly trudging that long path. Two more years until the post doc is over.

What we didn’t anticipate in our financial optimism is how long the road would be and how painful these years of low income and high student loan payments would be.

But I digress.

Financial Pessimism Isn’t Much Better

Clearly I shouldn’t have stated “we’re ALL” financial optimists because the comments on the post made me start thinking about the flip side–financial pessimism, which is nearly as bad as financial optimism. Financial optimists make their decisions based on a bright future that may or may not come. (That’s how we justified taking out $30,000 in student loans.)

Financial pessimists often make their decisions based on fear and assumptions of what might go wrong in the future. Though this seems like a much better place to be than a financial optimist because the pessimist is protecting what they already have, it’s not really. Pessimism can stagnate your growth.

[Tweet “Financial pessimists often make their decisions based on fear and assumptions…”]

My friend’s dad (I’ll call him Tom) inherited $100,000 when his uncle died. (His uncle had never married and didn’t have children of his own.) Tom had never seen that much money at once, and the idea of putting it in the stock market scared him. He was afraid he would lose it. Instead, he promptly put it all in a 10 year CD and earned a measly amount of interest. Plus, that money was locked up for years!

His fear and pessimism cost him money. Yes, he kept the money safe, but it was unavailable for 10 years, and he only made enough to cover the cost of inflation. He didn’t let the money work for him and grow because he was driven by fear.

Financial pessimism can also cause you career stagnation. Elizabeth has been at her job for 20 years now. She finds the job exhausting; over the last few years, more and more people were cut from the staff, but those positions were never filled. Elizabeth is now doing the work of several people; she often doesn’t get to go home early enough to see her young children before they go to bed. She wants a change, but she’s afraid that she won’t find a job that pays as well or has such good benefits. Her fear leaves her stuck in a position she doesn’t like, working too many hours, counting down to retirement that is another two decades away.

Financial optimism can hurt your bottom line by giving you confidence to spend money you assume you’ll make in the future. Financial pessimism can hurt you because you’re often fueled by fear which can cause stagnation and limit your financial growth.

What do you think is the best strategy to remedy financial optimism or pessimism?

Oregon Changing Student Loan Repayment?

July 19, 2013 By Shane Ede 7 Comments

Could the landscape of student loan repayment be changing? I have to admit, I don’t cover a whole lot of college topics here (because I’m a bit removed from that age group), so I almost missed this altogether. But, it kept coming through on feeds, and it finally piqued my interest enough to get me to take a look. I’m glad I did, because it’s actually gaining traction and could be something that becomes normal in the years to come.

What is the Oregon Pay it Forward loan repayment plan?

Pay it Forward seems to have had an interesting life cycle. It was originally devised by a class of college students, working with the Economic Opportunity Institute, and then presented to the state legislature. From there, it appears that the Working Families Party of Oregon, who happen to have been co-founded by the students’ teacher, took it under their wing and started pushing it. According to this article in the New York Times, the resulting bill passed the Oregon House and Senate earlier this month.

From there, I would imagine that it’s got all kinds of structural work to be done in order to put the systems and processes in place to be fully functional. But, once that’s done, it should become available to students in a few select universities and colleges sometime around 2015.

The plan, as it’s stated on the Working Families Party of Oregon website, will operate with a dedicated fund from which the tuition will be paid to the school. After the student graduates, and gets a job, the student will then pay a fixed % of their salary back into the fund for 20 years. The % that the graduate pays will depend on how much schooling they’ve received.

Under the proposed system, you would pay .75% of your adjusted gross income (AGI) for each year of school, or 45 credits. This means a student who goes for a 2-year degree would pay 1.5% of their AGI per year, while a student seeking a 4-year degree would pay 3%.

That should account, mostly, for the discrepancies of cost in tuition from a two-year degree vs. a full four-year degree. The website also states that should a graduate be unemployed, there would be no repayment necessary until the graduate attains a job.

Is the Oregon Pay it Forward plan a good idea?

In my opinion, it’s both good and bad. It all depends on how you look at it, really. If you’re like me, and intend to work in a profession that basically requires a degree of some sort to even get your foot in the door, it could be a really good deal. Heck, I’ve been out of college for 7 years. Almost half way to their repayment period. I’m not even close to half way to the end of my student loans, yet.

So, in that way, the plan might be a good thing. It lowers the financial barrier to higher education, and makes less of a burden of the repayment of any tuition bills. The lowering of barriers is also why I think it could end up being a bad thing.

Part of the reason that I think the higher education system is under so much fire is because it’s already too easy to get a student loan and go to college. If anyone can do it, suddenly everyone must do it. If you want any sort of foothold in the professional community of your choice, you’ll need that degree. That causes problems. Demand for a college education never decreases. The law of supply and demand says that the supplier (colleges in this case) can charge whatever the market will bear based on the fluctuations of demand. If demand decreases, so too should supply. If you want demand to increase, you reduce the cost of whatever you’re selling until demand begins rising again. But, if demand never decreases, why should the cost of the education? The supply of college attending students increases, increasing the demand for classrooms to teach them in and professors to teach them with. School expenses increase due to the new buildings and additional staff. If the fund for the plan doesn’t keep up, the money has to come from somewhere else. Know where? The state. More specifically, the taxpayers of the state.

It’s too early to pass judgement on whether the plan will work or not. Heck, the ink is barely dry on the bill itself. It’s still got all kinds of tape to work it’s way through before it can begin being used. I doubt that we’ll see any real results aside from an increased enrollment in the schools that pilot the program for at least 5-10 years. Remembering that repayment likely won’t start for 4 years from the first enrollment.

I think it’s clear that the current state of student loans and their repayment needs to be reworked. It’s unclear, however, whether this plan is the right answer. It might be part of the answer though. Combine something like it with a more rigorous acceptance process, and you might have a winner.

What do you think? Is Oregon changing student loan payment forever? Is the program the right answer? What would you change? Would you have used it if you had the opportunity when you enrolled in college? (I would have)