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Lending Club Review

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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?

Betterment Review

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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:

  1. for accounts under $10,000 the annual percentage charged is .35% of the balance,
  2. for accounts of $10,000 and up to $100,000, the fee is .25% of the balance,
  3. 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.

What To Do With Savings

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What To Do With SavingsThe Question…

DFA reader Stacy asked:

I have $20,000 in a savings account and almost no debt. What is the smartest, most conservative way to invest my money. Sitting in a savings account feels like a waste.

The Answer…
Great question Stacy, let’s take a look. My recommendations are to:

  1. keep some cash in savings for use in emergencies (emergency fund)
  2. keep some cash in savings for your next vehicle rather than financing it (auto fund)
  3. keep some cash in savings for fixed non-monthly expenses
  4. invest the rest in safe, passive investing vehicles.

Emergency fund

Be sure to keep enough cash in a savings account to cover three to six months expenses. If your monthly expenses are $3,000/month then keep between $9,000 and $18,000 in your emergency fund.

Do not invest this, it is for emergencies and needs to stay in liquid cash form so you can get to it quickly and easily when needed.

Next auto fund

Do you own your current car? If so, great, but be sure to save for you next vehicle so you don’t have to finance the purchase.

Financing vehicles is a waste of money. Some people can’t avoid it, but those with liquid cash on hand can, and they should.

Don’t buy new either, buy solid used vehicles that are a few years old. This helps you avoid that huge loss in value when new vehicles are simply driven off the lot.

I’ll never finance a vehicle again, and advise you to adopt the same position whenever possible.

Fixed non-monthly expenses

Stacy, are you budeting for fixed expenses that you know are coming, but are not monthly? I call these fixed non-monthly expenses.

Examples of these expenses are:

  • auto insurance (we pay once every six months)
  • bulk beef (we buy a quarter grass fed cow every year)
  • CSA membership
  • continuing education.

These expenses can be budget busters, but not if you plan for them!

Make a list of all your fixed non-monthly expenses, figure their cost on an annual basis, add the total amount up and divide by 12. This gives you the monthly amount you need to save to have enough money for these expenses when they arrive.

We created a separate Capital One 360 savings account called “Fixed Non-monthly Expenses” that we use to hold the liquid cash, and we tap that fund whenever one of these payments comes due. It is very useful and it saves us from having “budget busters.”

Invest the rest

Many people invest before they build adequate savings.

While it can be tempting to put all your savings into investments, it’s often not the best decision.

You need liquid cash too!

Keep liquid savings for the things mentioned above (plus any other needs specific to your situation) and invest the rest.

I too like conservative investments, and I prefer them to be mostly passive. In other words, I’m not going to advise you to go out and day trade stocks.

My recommendations are to invest in index funds and peer lending.

Open a brokerage account with Vanguard and invest in their target retirement fund that best fits your situation. This will give you diversification, balanced risk, and hands off conservative investing.

Another great option is to open a Betterment account. Betterment has built an amazing platform that helps new investors safely navigate the waters of the financial markets with confidence. Read my Betterment review and consider opening an account.

In conclusion

Right now Betsy and I have enough money saved for emergencies, our next vehicle, a years worth of fixed non-monthly expenses, and we’re investing the rest.

It feels good to be prepared.

Does anyone have any other advice for Stacy?

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