Kevin Mercadante, Author at Live Debt Free

Lending Club Review

02.11.2013 by Kevin Mercadante //

At a time when investors are making record low interest rates of little more than 1-2%, there is an opportunity to earn much higher returns through peer-to-peer investing with Lending Club.

And for would-be borrowers, the news is almost as good. They can borrow money from Lending Club investors at rates generally below those offered by credit cards. They can do so without putting up collateral and without all the red tape that comes along with borrowing from a bank.

Note: A few years back Matt used Lending Club to consolidate his debt and has been investing with them ever since paying off that loan. Over the last three years he has averaged an interest rate of over 10% on his investments with Lending Club. (Read more about Matt’s first hand experience with Lending Club.)

What is Lending Club

Lending Club is a “peer-to-peer” lending company, matching borrowers directly with lenders.

The model removes banks from the process, enabling the borrower to pay a lower interest rate, and the investor to earn a higher rate of return. The company is the first peer-to-peer lending organization to be registered with the Securities Exchange Commission.

The company began operations in 2007 and has originated over $1 billion in loans.

According the company’s website, the latest statistics–as of November 23, 2012–include:

Loans funded to date: $1,348,306,700
Interest paid to investors since inception: $114,375,168

77.32% of Lending Club borrowers report using their loans to consolidate debt or pay off their credit cards. Can I get an Amen?

How does Lending Club work

Both investors and borrowers can go to the Lending Club website (borrowers click here | investors click here), sign up and investigate the loan programs available, including loan requirements and grades, interest rates, terms and any other factors connected with the transaction.

Loans sizes range from $1,000 to $35,000 (the maximum loan amount), and are unsecured, personal loans. If a borrower is determined to be credit worthy, Lending Club assigns them a credit grade that determines the interest rate charged. Credit grades are determined by the borrower’s credit characteristics, including credit history and credit scores, loan amount and debt-to-income ratios.

Loan (or note) listings are provided on the Lending Club website that reveal the loan grade, loan amount, and loan purpose. Investors can choose loans to invest in from the listings, deciding, for example, what loan grades and interest rate terms they deem acceptable – then they can save the filters and use them later to find and fund more notes.

How investors benefit from Lending Club

According to the site, Lending Club has over 45,000 investors who have funded more than $1 billion in loans. And they have collected over $114 million in interest payments.

Lending Club Notes ($20,000 denominations) have a net annualized return that is determined by loan grade. For an A note, the net annualized return is 5.66%, ranging up to a G note with a return of 12.07%. The nominal average interest rate is 14.21%, with an average default rate 4%, and an average net annualized return of 9.64% (Matt is currently earning at 10.23%).

Lending Club itself makes money by charging a service fee to investors and a loan origination fee to borrowers, similar to points charged by a mortgage lender.

Investors start by opening a account with Lending Club and depositing their money. They then choose the loans they want, based on the expected rate of return on investment and the level of risk they’re comfortable with. Higher rate loans also carry higher risk, while lower risk loans offer lower interest rates.

Click here to learn more about investing with Lending Club and to open an account.

How Borrowers benefit from Lending Club

Borrowers can borrow money through Lending Club for less than they’ll pay for most other loans. Since there’s no “middle man” in the Lending Club process, they can see a loan approval in less time and with much less documentation. Borrowers can get debt consolidation loans to pay off credit cards charging, say, 15% with a loan from Lending Club carrying a rate well under 10%.

Which is exactly what Matt did. He consolidated three credit cards and an auto loan, then paid it off in seven months.

Lending Club isn’t a “no other way” lender, and there are some stipulations that keep loans primarily to higher quality borrowers. According to the website, fewer than 10% of loan applications are approved. The credit standards are pretty stiff, with a minimum credit score of 660.

This is because Lending Club likes to deal with borrowers who are going to pay off the loans. Makes sense right?

Some statistics on the profile of the average borrower from the site:

715 FICO score
14.98% debt-to-income ratio (excluding mortgage)
15.21 years of credit history
68,831 personal income (top 10% of US population)
Average Loan Size: $12,159

Even with the high credit standards required by the program, Lending Club offers tangible advantages for borrowers who do qualify.

As mentioned above, 77.32% of Lending Club borrowers report using their loans to consolidate debt or pay off their credit cards. How cool is that?

Click here to learn more about borrowing with Lending Club and to open an account.

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Betterment Review

02.06.2013 by Kevin Mercadante //

The past few years have seen the rise of a number of specialized, online investment management services. One of the better programs out there is Betterment.

Betterment describes itself as “The fully diversified, automated, and smart investment account that helps you feel good about your future.” It offers a simple, efficient investment system that will appeal to a large number of investors.

How Betterment Works

Betterment uses a simple investment strategy that’s based on two investment options, referred to as baskets. One basket is made up of stocks and the other of treasury bonds. But rather than holding individual stocks, each basket is comprised entirely of a mix of exchange traded funds (ETF’s).

As an investor, all you need to do is set your portfolio allocation and the system handles your investing for you.

Unlike many online investing services, Betterment does not require a minimum opening account balance. If you open your account with less than $10,000 however, you will be required to make monthly deposits of at least $100 until the balance is achieved. Once you reach the $10,000 mark, continued monthly contributions are optional.

You can move money easily and automatically between your Betterment account and any outside accounts you have with next day transfers. The system also allows you to do investment projections online simply by changing asset allocations and projected contributions.

One of the coolest parts is that you can “try before you buy” so-to-speak by running savings goal scenarios before actually committing the money to those investment mixes.

Betterment will also give you $25 if you open and account with at least $250.

Betterment Pricing

In regard to investment fees, Betterment has no transaction fees, but charges a management fee based on portfolio size. There are three pricing tiers that determine the amount of the management fee:

for accounts under $10,000 the annual percentage charged is .35% of the balance,
for accounts of $10,000 and up to $100,000, the fee is .25% of the balance,
for balances of $100,000 and higher the annual fee is .15% of the balance.

If your account balance is $100,000, your annual account management fee will be .15% of the balance, or $150.

This makes betterment one of the lower cost investment systems around, especially on accounts with higher balances.

Betterment Advantages

Pricing is an obvious advantage with Betterment. To be able to maintain $100,000 of managed investments for just $150 per year would be difficult to duplicate elsewhere.

Simplicity is another advantage. You can set your portfolio allocation between stocks and bonds and management will take it from there. You don’t need to actively trade, to follow your investment positions on a daily basis or to make changes.

Betterment also has professional management which saves you the time and effort that will take to become a successful investor. And rather than investing in stocks, management invests instead in ETF’s. That not only keeps trading expenses at a minimum, but it also achieves significant diversification within each asset class.

Management’s investment philosophy also seems very solid. The bond basket is invested in ETF’s that hold Treasury Inflation Protected Securities (TIPS) with maturities of three years or less. That minimizes interest rate risk that is inherent with longer-term bonds. This makes Betterment’s bond positions more secure than typical bond funds

The stock position is held in ETF’s that invest in value funds and small-cap funds. At this time the entire stock portion is held in US based stocks. Betterment holds the stock position in several ETF’s that are determined by management to best achieve the program’s investment goals for its equity positions.

Like many of the online investment systems available, your holdings in the account will be limited to Betterment’s baskets. You will not be able to hold individual stocks, mutual funds, or ETF’s as you would in a typical online brokerage account. Betterment is, after all, a managed investment account, and not a general investment account. This is how they keep it simple for you, the investor.

On balance, Betterment looks to be a good investment choice for most investors, particularly for those who are looking for aggressive equity investments, counterbalanced by conservative bond investments. And the cost and simplicity will be hard to beat anywhere.

You can get more information on how Betterment works, and take advantage of a free 30 day trial offer and the $25 bonus by visiting the Betterment website.

You can also read Matt’s Betterment Review here.

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Avoid the Pitfalls of Permanent Debt

01.28.2013 by Kevin Mercadante //

When we first get into debt most of us have the best of intentions. The debt we’re taking on is only temporary, right? Once this credit card, car or house is paid off I’ll never borrow money again! That sounds good – but do we really mean it?

Remember: debt is deceptive. It buys us what we want now and the payments are so easy that we get “settled in.” We no longer think about paying the loans off, just how we’ll manage the payments. At this point debt becomes permanent. It doesn’t matter that credit cards are revolving arrangements or that car loans will be paid off in a few short years. You’ll always have debt of one kind or another – so you stop fighting against it.

Permanent debt in the making

When you reach the point where you’re comfortable with debt – and most people do – your debt becomes permanent. The lenders and the loans may change from time to time, but you’ll always have the debt.

Here are three reasons you’re in perpetual debt:

New car every 5 years. One of the biggest causes of permanent debt is buying a new car every five years or less. By doing this you always have a car payment. Sure, it’s nice to have a new car – less repairs and maintenance, latest safety features and all – but it’s a pattern that keeps you forever in debt. Maybe you always pay off the debt on each car, but as soon as it’s paid off you take out another loan to buy the next car. (Learn how to stop financing vehicles.)

Perpetual mortgage refinancing. This one can be a tough call for a lot of people. If you’ve been refinancing every few years to take advantage of what seem to be ever lower interest rates, it really can seem like the right thing to do. But along the way, it’s typical to take some cash out (increasing the loan balance) or recasting the mortgage back to its original term. If each time you refinance, you recast a 25 or 27 year term back to 30, you’ll never pay off your mortgage. Many people do this and in the process create a perpetual mortgage for themselves. (Maybe you should rent instead and save for a house.)

Once a Visa, always a Visa. Credit cards take the top prize as the most stealthy of all debt – their marketing departments are full of geniuses. You start out borrowing a small amount – fully intending to pay it off next month – but the another “emergency” expense hits and the revolving feature takes over. Each month you’re borrowing a little bit more that makes the balance so large that paying it off becomes more of a wish than reality. You begin to resign yourself to the fact that you’ll always have credit card debt. (Learn how to pay off credit card debt.)

Debt is NOT your friend

Ask anyone who’s been through a foreclosure or bankruptcy – or who has been hounded by collection agents about one or more debts – and they will tell you this:

“Debt is only ‘friendly’ when you can afford to pay it. When you can’t, it becomes one of your worst enemies.”

The best way to avoid this outcome is by not being so friendly with your debt, especially when you can’t afford to pay it. We should never get comfortable with a debt, any debt, including a mortgage.

Debt increases your cost of living, cuts into your savings, and compromises retirement planning and funding. That doesn’t sound very friendly at all.

All debt should be temporary

In fact, the worst aspect of debt is the potential to get comfortable with it. Once you do, your debts have won control of your financial life. The way to change this is by viewing your debt as temporary – which is what debt is supposed to be.

If you have an installment loan, like an auto loan, and it runs for five years, plan on paying it off in no more than five years. And when the loan is paid, don’t take that as a cue to buy a new car! Instead, keep making those payments but stash them in a savings fund and use em to purchase your next vehicle with cash.

Credit cards? The basic advice stands here; plan to pay the balance in full each month. Credit cards should never be treated as an extension of your paycheck, or as a way to pay for what you really can’t afford.

And as far mortgages, 30 years is long enough! It’s okay to refinance and take advantage of lower interest rates, just be sure you never extend the term of the loan – ever. In other words, if you have 25 years remaining on your 30 year loan, the refinanced term should be no more than 25 years. So if you bought your house in 2005, you’ll still pay the mortgage off by 2035.

The best way to deal with a debt problem is by never getting into it in the first place. Borrow only if you have to, and when you do, make sure that you pay your loans off in the term provided – or less.

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