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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.

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, 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.

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?

Categories // Debt, Investing, Reviews Tags // borrow, Debt, Investing, Lending Club, loans, peer lending

Should I Use My Retirement To Pay Off Debt

03.23.2012 by Matt Jabs //

The question…

DFA reader Josh asked:

I am in the military and at the point were i can get a bonus of $30,000 if I reduce my retirement to 40% of my base pay at 20 years – or – stay with high 3, which is 50% of my base pay at 20 years. There are options on how to get the $30,000: one payment, two at 15,000, three at 10,000, four at 7,500, or five at 6,000.

I have done some research on the subject and everything thus far says taking the 30,000 is a bad idea, but I like to cover all bases before doing anything. Also right now I have about $125,000 in debt, but I make enough to still meet all my bills. What would be the better thing to do, take the bonus and pay off debt, or keep the retirement plan for 50%?

The answer…

Josh, I believe you’re referring to the military’s REDUX retirement system. Since I’m unfamiliar I included a few great articles from The Military Wallet in the Resources and References section below. Check them out.

In general, here are three important factors to consider before tapping into retirement to pay off debt:

  1. your goals
  2. the type of debt you have
  3. your debt-to-income ratio.

Retirement goals

Everyone has different retirement goals.

How old you are, how much you have saved, and whether or not you plan to retire at all are several criteria to help layout your goals.

I don’t plan to retire. My goal has always been to find my passionate life’s work and pursue it, in some manner, until I’m gone – so my income may be rolling in until I die.

If your plan is to work a career for so many years and retire to something else, your goals will be different because you plan to live off retirement savings.

Define your goals to best answer the question.

Type of debt you have

Everyone has different types and amounts of debt.

Josh has $125,000 but we’re not sure what type of debt that is.

If the debt is low interest rate mortgage or student loan debt, tapping into savings to pay it off may not be a great idea.

If it’s high interest credit card debt, the decision will probably be different.

Define the type and amount of each debt to best answer the question.

Your debt-to-income ratio

Commonly referred to as your “DTI,” your debt-to-income ratio is a personal finance benchmark that relates your monthly debt payments to your monthly gross income.

Everyone has a different debt-to-income ratio.

Josh mentioned making enough to meet his bills but didn’t specify how much he makes or if he has extra income at the end of each month.

If paying the minimum payments on your debts leaves you with little to no money at the end of each month, taking the bonus to kick-start better financial health may be a good idea.

If you have extra money after meeting your monthly budget, it may be best to leave savings alone and use the extra to speed debt repayment.

Define your DTI to best answer the question.

*******

References and Resouces

  • “Your Debt-to-Income Ratio: What It Is and Why You Should Care” on FiveCentNickle.com
  • “Is REDUX Retirement Worth it?” on The Military Wallet
  • “Can Your Investment Returns Make REDUX a Good Retirement Option?” on The Military Wallet

Categories // Debt, Retirement Tags // Debt, Retirement, Savings

11 Ways We Dove into Debt and How We’re Digging Out

03.21.2012 by Matt Jabs //

It was not all that long ago that our ‘Debt Free’ Adventure was more like a ‘who cares how much debt we have’ adventure.  I suppose we were semi-responsible in that we never made ourselves house poor, nor did we ever go hog wild on gadgets or toys.  In fact, the reason we accumulated debt at all is simple… up until January of 2009 we never understood how powerful a prison of debt can be.

Now that we do understand the power of debt slavery, we avoid it like the plague.

Mindset of the chronically indebted

Before I get into specifics, it is important to touch on a few “thinking problems” we had that are commonly shared by those in deb, you have to change your mindset:

  1. We just didn’t care – By far the biggest personal finance problem for us was simply our lack of responsible money management.  If we would have taken control of our financial reigns from day one we would be in a much better position.  Oh well, since we can’t change the past we focus on doing the right thing going forward.
  2. Influenced by culture – One of the biggest reasons we slowly let ourselves get into debt was because we did not purpose to think for ourselves.  Rather than responsibly determining our purchases based on actual savings and income, we bought according to cultural norms.
  3. We make decent money – We figured because we were both college educated, working professionals that we should be able to have certain things.  Rather than responsibly determining our purchases based on actual savings and income, we presumed our income would always be there and leveraged against future income.
  4. We deserve nice things – Because we sacrificed and worked hard all the way through school, we felt as if we deserved to buy nice things the day we began earning rather than the day we had actually accumulated the savings.  Rather than responsibly determining our purchases based on actual savings and income, we felt as though we deserved nice things before we actually earned those nice things.

Ways our debt accumulated

Here are a few specific ways our debt built up over the years:

  1. We ate out constantly – Before analyzing food costs we rarely planned or prepared meals in advance, instead we would just eat out whenever we felt like it.  Now we set a strict budget for groceries and dining out and are careful to stick to it every month.  Not only do we save thousands of dollars each year, but we have also lost around 60 combined pounds.
  2. We never used a budget – Rather than telling our money where to go, our money would just seem to vanish into thin air.  This always happened, regardless of how much money we made.  Now we give every dollar a job rather than wondering where it all goes… and boy does it feel great!
  3. Credit cards as an emergency fund – Rather than save money for emergencies, we chose to go into high interest debt each time we had an emergency.  Saving for emergencies was a personal finance fundamental we lacked in times past but have since adopted… and we feel much more secure because of it.
  4. I fell for the HDTV craze – I take full responsibility for all our financial irresponsibility… but this particular purchase deserves a special mention.  Against her better judgment, my wife gracefully went along with my decision to purchase a $2,000 television – bless her heart.  This was obviously a terribly unnecessary purchase decision on my part.  We had a 27″ television that worked perfectly fine, but for whatever reason I just had to have a fancy new boob tube.  I would sell it in a heartbeat if I weren’t sure to lose my tail on it… so we just keep it and plan on having it for a loooooooong time.  🙂
  5. Bank fees – Oh my word… I hate talking about this because it makes me feel like such a D-bag.  Before we started our debt free adventure it was not super uncommon for me to be hit with bank fees.  Both over-the-limit fees and late fees were things that ate up a good amount of our money over the years.  Never again I say… never again!  Next to responsible management of our money the best move we made to avoid bank fees was switching to Capital One 360 Bank – they treat us so much better than any bank in the past.
  6. Just swipe it – We used to just swipe our debit cards for everything with the only requirement being a positive balance in our checking account – and even that was ignored sometimes.  Now-a-days we use cash envelopes for our five most easily abused budget categories:  groceries, miscellaneous, dining out, entertainment, and clothing are all kept under tight reigns by limited amounts of cash each month.
  7. Alcoholic beverages – Rather than waiting until we were home to enjoy a beer or glass of wine for much cheaper, we would order drinks with dinner.  A lot of people talk about the latte factor, but I wonder if the less popular alcohol factor eats up just as much or more of the average American family budget.  Now-a-days if we want an occasional beer or glass of wine we just wait until we get home.

Of course there are other factors that contributed to the debt we battle so fervently today… but this list gives you a good idea of what not to do if you want to win with money.

Ways you got into debt

What are some specific things you have changed or need to change in order to avoid future debt and help dig your way out of existing debt?

photo by Joe Shlabotnik

Categories // Debt, Money Management Tags // Debt, emergency fund, mindset, save

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Content on Debt Free Adventure is for entertainment purposes only. Rates & offers from advertisers shown on this website may change without notice: please visit referenced sites for current information. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. We respect your privacy. Privacy policy.

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Disclaimer

Content on Debt Free Adventure is for entertainment purposes only. Rates & offers from advertisers shown on this website may change without notice: please visit referenced sites for current information. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. We respect your privacy. Privacy policy.

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