The Lending Club Primer, Part 2

In my first installment, I gave a brief introduction on how to become a borrower or lender. Today I'm going to talk more about it as an alternative to a traditional bank loan, and an investment alternative or supplement.

Alternative to a Traditional Bank Loan. In order to borrow from Lending Club, you will need a minimum FICO score of 660. If you have good credit and payment history, this may be a good alternative to a traditional bank loan. The rates are competitive, but more than that, you might be able to get a loan for things most banks won't give you money for. A lot of banks have tightened up lending, and aren’t lending for even things like small business growth. If that is the case, you can take your plea to Lending Club and see if a community of lenders are willing to invest in you. Banks usually won't give you an unsecured loan for things like cosmetic surgery, but it is a request I see frequently on Lending Club.  Many from people with birth defects or accidents.  Some from strippers looking for a career enhancement.  Hey, as I said before, we’re only here to judge your FICO score.  If your FICO score is good, you will usually get the money.

All loans from Lending Club are fixed rate on a three year term. The minimum payment includes principal and interest. At the end of three years, your loan will be paid in full. There are no prepayment penalties. If you want to borrow the money and pay it back in a month or two, you can. If you are late on a payment, you will be charged a late fee. If you default on the loan, Lending Club will report you to a collections agency, and you will suffer the appropriate credit penalty.

Investment Alternative/Supplement. Most "High Yield" bank accounts are anything but these days. CD rates are pathetic. I need a place to stash my short term money that isn't tied to the stock market performance. I think of Lending Club loans like a 3 year CD that might terminate early (if my borrower pays in full early). When my borrower makes his/her monthly payments, I get back my proportion of the principle I contributed to the loan, plus interest earned.

Are there risks? Sure. You are counting on your borrower not defaulting. Lending Club puts a few restrictions on how much money a borrower can borrow (we’ll talk about that in the next installment).  There are a couple of ways to diversify your risk.

1. Look at the FICO scores of the borrower, and determine your level of risk. A+ borrowers rarely default. If you want to play it safe, you can choose to lend only to A+ borrowers.
2. Diversify with a mix of low/high risk loans. You can improve your average rate of return if you choose a few higher risk loans. This is how banks used to make their money. They would have a collection of loans from people who were pretty much assured to always make their payments, plus a few 'risky' borrowers whom they would charge higher interest rates so they could make more money.  
3. Loan a small amount of money among many loans. I usually loan $25-$50 per loan over many loans. This way if one or a few of my borrowers default on me (three years is a looong time), then I won't miss it. This Is also the way banks used to make the majority of their money. If their high risk borrowers defaulted, they could still count on their low risk borrowers to stay ahead.

In the graphic, you'll see that Lending Club shows you charts with your risk diversification and your average rate of return based on your portfolio. You'll see how many of your borrowers have been charged late fees, defaulted, or are uncollectable. If your borrower is late, you will get a proportion of the late fee in your monthly collections. If your borrower is in default and given a penalty, you'll get a portion of the collection fees. If your borrower defaults and Lending Club is unable to recover, then you and everyone who contributed to the loan will lose what they put into it.

There aren't any fees for lenders, except Lending Club retains 1% of your earnings. So when calculating your earnings, factor that in.

I've been lending on Lending Club for about a year, and I've found it to be an easy, straightforward process. I browse loans, read the descriptions, and diversify the money I want to spend over many loans. When I receive my earnings, I transfer them to my regular bank account. You may also reinvest your earnings into new loans (minimum is $25). Your earnings when they are not invested into a note will not collect any interest, so it's best to move them into a new note, or into an interest bearing account as soon as possible.

Update: Fixed error in term rate.  Terms are fixed at three years, not five.

Read: The Lending Club Primer, Part 1 and The Lending Club Primer, Part 3.

Frugality Means Efficiency

Frugality to me means efficiency. I use as much as I need because it's efficient.

There's been a lot of discussion lately about stupid frugality and such. Take Trent from The Simple Dollar's response to Ramit from IWillTeachYouToBeRich.com's The Challenge. I draw the line at rewashing ziplock bags. Rewashing and reusing ziplock bags is not efficient or frugal. Why? Because you're using something disposable that is easily replaced by a high quality, truly efficient and reusable alternative.

Back in 2000 I went to a friend's Tupperware party. I bought two 'leftover lunch' containers. One was compartmentalized into two sections. They both had tops with a small vent that opened to let steam out while microwaving. I love these things - I still have them to this day.

Here is their new version of the Tupperware lunch container. Mine doesn't look like this but close enough. Look at the price - holy crap! $15!

Yep. $15. That's about what I paid for mine. Let's figure this out. I bought them in 2000, and of course, I haven't used them every single day. Let's assume that I only used them 40% of the time over the years.

365 days/year x 8 years = 2,920 days
2,920 days x .40 = 1168 days
$15/1168 days = $0.0128 per day

So it's cost me a little over a penny per year to use if I only used it 40% of the time in a year. A rewashed ziplock baggie has an environmental impact - you have to throw it away at some point.

I also bought a Zojirushi Lunch Jar. I love this thing. It's easy to put together a well balanced lunch. I put a salad in the big jar, protein in the small jar, and a starchy food in the medium jar. It's been fabulous for my diet to manage portion control and carb/protein/fat ratios. It's fun putting together bento lunches.

Note that I bought very high quality containers. Tupperware lasts forever. They were made to survive children torturing them for goodness sake. My mom's Tupperware she bought in the 70s survived me, and she still uses them to this day. Don't buy those crappy ziplock containers at the supermarket. I've done that and they last me a year tops before they become so mangled their lids don't fit anymore.

Smart Frugality = efficiency.

Two Minute Update: What's with all the Toilet Paper Stories?

The war on toilet paper is ON. Take it like a man, you yank snowflakes, and not only use less toilet paper, but like it rough n tough to save the world.

American taste for soft toilet roll 'worse than driving Hummers'

The Lending Club Primer, Part 1

With the economy in an uncertain state, I've been looking for avenues to invest my money that is not related to the stock market. One of these is through the peer to peer lending site LendingClub.com. I've been a member since about April 2008, so here is my brief take on how it works, and how well it works.

What is Peer to Peer lending? Lending Club is a social network like Facebook or MySpace, but it connects people for borrowing or lending money. Borrowers and lenders are average citizens, not a banking entity.

Cool. What are the requirements to be a lender? The requirements are similar to opening any other bank account in the United States (US citizens only - Zopa.com is the equivalent in Europe). You must be at least 18 years of age and have a social security number. There are no credit checks for lenders. To transfer money, you need to setup a link to a bank account that is verified through random deposits.

Update: Since the time I first signed up, Lending Club has changed its filing with the SEC and their requirements for lenders is different. You now need a minimum income level and net worth. It is not available to residents of all 50 States yet. Read the details in their Lender Requirements FAQ. I suspect a lot of these changes are due to lobbying by 'them'.   I don’t know how they are checking income levels and net worth, and how strict they are about it.  Please let me know if you sign up.

I need some money to visit my alien cousin on Mars. What are the requirements to be a borrower? Ok...that's cool. We're not here to judge. Well that's not entirely true - we're here to judge your FICO score. I've seen some funky things being funded that a traditional bank wouldn't approve you for. You tell everyone why you're asking for a loan. They may ask you questions about it (like, if you've seen a psychiatrist lately). Most likely, though, we're going to want to know how you're going to make your payments if you're on Mars. Do you have direct deposit from the mothership? Fax the stub to Lending Club and we'll check it out.

You meet a minimum set of requirements to become a borrower. You submit information for a credit check. Your FICO score needs to be a minimum of 660+, which is a little over subprime. Your debt to income ratio is below 25% (excluding mortgages). Your revolving credit utilization is less than 100%. You have no bankruptcies in the past 7 years, or collections in the past 12 months. There are a couple of other minor details, but those are the biggies. If these things check out, you'll probably get your money and you're going to Mars!

How do I sign up? Use my referral link, you'll get a signup bonus of $50 to try out. Score!

Scored! So how do lenders and borrowers meet up? I am a lender. As a lender, I browse 'notes' from borrowers. I can browse their requests for average rates of return, credit score, debt to income ratio, and delinquencies. Basically, I can choose the risk level that I want. There's a chance that my borrower could default on his/her loan. Looking at the overall picture of their credit history, I can guess how likely they are to pay me back. Just like how loan officers used to do it before they went all "Banks Gone Wild". I can lend my money to only A+ borrowers if I want, or diversify with a few more 'risky' borrowers. By lending a portion to higher risk borrowers, I can increase my average rate of return.

The graphic illustrates what browsing notes looks like, and how to define your search criteria for your risk tolerance. I'll explain more in the next installment.

Read: The Lending Club Primer, Part 2 and The Lending Club Primer, Part 3

Preparing for The Unthinkable

I recently read Trent's story from GetRichSlowly's Where can you Turn if You Lose it All and it made me think about all the reasons I've worked so hard to be self sufficient.

The summary:

I received a long email recently from an utterly despondent woman (that I’ll call Ellen) who was caught in a devastating situation. A year ago, she was a stay-at-home mother with three preschool-aged children. Her husband worked at a high-paying job that seemed to have great long-term potential and it seemed as though their life was set.

Then, very suddenly, her husband died in a car accident, and there wasn’t much life insurance money. Within months, she was back in the workplace at a fairly low paying job, her family had moved into a tiny apartment, and the house was up for sale. Then, just as quickly, she was laid off from that job and the house sold for roughly what was still owed on it. Within a year, she was back living in her parents’ basement, a single mother with three young children and few assets to her name, searching for any job in her field of expertise while working as a gas station attendant.

There are many families who choose to be single earners while one parent stays at home. There are many good, and valid reasons for doing so. However, there is significant risk of a catastrophic situation described by Ellen. The stay at home parent has been out of the work force for a long time, and is behind in skills and work experience. The health insurance they depended on is suddenly gone. The assets they had saved isn't adequate, and she realizes it too late.

No one can see the future, however, everyone can assess their risk areas. For single earner families, what happens when your husband is suddenly out of the equation? Gets fired from his job? Dies in an accident? Decides he's just not in love with you any more? Plane crashes on a weird tropical island and he can't escape?

Emergency Fund. Yeah, you knew I was going to say that. No matter whether you are a single or dual income family, you have got to make sure you have enough money saved that will take you through 3,6, or 12 months worth of bills. That will buy you some time if one of those situations occurs. You can focus on your grief and getting things in order for your next step. If you have children, this is your number one priority.

Keep working on your skills. In today's internet age, there's no reason why you can't keep current on some of your area of expertise or learn a new skill. If you were a web designer before quitting your job, keep designing. Learn a hobby or skill where you can make side money that can turn into a career if need be. JK Rowling is the ultimate inspiration for this. Some professions will be easier to do this than others.

Life insurance is a tricky one. Not everyone will qualify. It is not easy to get, but it's easy to get trapped by a scummy plan. I would rather rely on my own income potential and investments. You can withdraw from Social Security, 401Ks, and IRAs in some dire circumstances. I would rather put money I would pay to a life insurance policy into one of these instead, but your mileage may vary. Of course, a 401K or IRA won't help you if you don't have them or are not a beneficiary. If you are dependent on a single earner, make sure you are involved with this.

I know it sucks to think about whether the one you love is going to be suddenly gone. But if you realize you would be sh*t up the creek instead of grieving, and think you could handle it, you need to start thinking about it.

In Defense of Stupid Frugality

I use 2 tablespoons of cocoa. I conserve toilet paper. I am, what you would call, a stupid frugality person.

Why do I like stupid frugality tips like use 2 tablespoons of cocoa instead of 3? Conserve toilet paper? They can't save you more than pennies. What's the point? Use as much as you want, they'll make more!

Both my grandmothers grew up in the post war Depression era. One in the United States; the other in Korea. While their circumstances were different, the lesson taught to me by both of them is waste nothing. Both my grandmothers used every scrap they had, whether it was food or clothing. They were remarkably resourceful. They conserved salt or tea because they were incredibly smart women who knew how to make efficient use of anything they had.

I'm always horrified when I go to restaurants and see people leave a table of uneaten food. It could have easily been boxed up and taken home, but they don't care. It gets thrown away because it's so plentiful, it's not valued. When I drink a cup of tea or cocoa using one or two spoons instead of three, I think of my grandmothers. They conserved it because they didn't have much, and it was a precious. It's not going to save me millions of dollars, and I'll retire a millionaire because of it, but does that give me an excuse to throw it away callously?

I don't do it because I think this will save me riches. I do it because I don't want to be wasteful.