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Risky Business: Using Payday Loans to Pay the Subprime Mortgage

December 18, 2007 By 4 Comments

I mentioned previously that the subprime mortgage crisis should impact your personal loan strategy because of the number of desperate people needing just a little quick cash to prolong a slow fall into bankruptcy and foreclosure on their homes. CnnMoney confers with their article on the number of people taking out Payday loans to pay the mortgage payment. In a small sample, 66% of the people in foreclosure counseling admitted to taking out payday loans to pay their mortgage payment. After fees and other payments, payday loans can reach interest rates of nearly 400% per year.

If anyone is considering lending money to a a home owner Prosper.com or Lending Club, I would ask any borrower who is a homeowner if s/he has an adjustable rate mortgage, and if so, when it will reset and what the new payment will be. There may be someone people who realize that they sitting under a time bomb of a mortgage and are trying to buy more fuse to the foreclosure bomb. The pending bailout is all the more likely to make people try desperate measures to fend off foreclosure since they are now waiting on the federal plan to save them.

Quote from the article on payday loans being used to payoff mortgages in Cleveland, Ohio:

“If you want to see what an unregulated market economy looks like,” said Rokakis, “come to Ohio.” There are now more payday lending shops in the state than McDonalds, Burger Kings and Wendy’s restaurants combined, he noted.

Lenders only require borrowers show pay stubs, checking accounts and references. They don’t credit-check, except to make sure borrowers haven’t defaulted on previous payday loans.

The lenders ask borrowers for post-dated checks for the amount borrowed, plus fees, which average $15 per $100 loan. If the loan goes un-repaid, lenders deposit the checks.

The term is usually two weeks, “Most people believe they’re just going to borrow the one time,” said Faith. Instead, when the two weeks goes by, they often go back to the shop and roll it over for another two weeks. To do that, they pay another $45 in fees…

When the CRL took the average payday loan principal as reported by state regulators and multiplied it by the average number of loan rollovers per year, it found that typical borrowers pay back $793 for a $325 loan.

At those rates, a person with a pending foreclosure [Read more...]

Filed Under: Prosper, Risk, The Economy Tagged With: , ,

Where Should I Invest My Next $500? You Decide

December 9, 2007 By 6 Comments

In honor of Prosper.com’s post mentioning the wisdom of crowds, I have decided to allow the readers of Personal Loan Portfolio to decide where I invest my next $500*. The poll is listed below…

Update: People’s Choice Poll Results and Analysis Posted.

Should I invest my next $500 in P2P loans at Prosper.com, Lending Club, or Zopa or skip P2P lending all together and invest in [Read more...]

Filed Under: Lending Club, Prosper, Risk, Selecting Loans, Zopa Tagged With: , , , ,

Examining the Lending Club Risk Rating Score

December 9, 2007 By 2 Comments

Late night web browsing brought me view Rate Ladder’s first Lending Club portfolio. He posted some good suggestions for improving Lending Club as I think I did on my review of my first loan portfolio with Lending Club.

One item in his review of his first Lending Club portfolio left me scratching my head when compared to my first loans. [Read more...]

Filed Under: Lending Club, Risk Tagged With: ,

Prosper and Lending Club Advice for New Lenders

December 4, 2007 By 18 Comments
Advice for new lenders on Lending Club and Prosper Marketplace

Advice for new lenders on Lending Club and Prosper MarketplaceBased upon my recent request, I received some useful advice from several P2P lending bloggers that I was grateful to receive before investing in my first loans with Lending Club. I am also excited to share this advice with other potential lenders. First, let me offer my own advice that I wrote on another site I just started – Five Prerequisite Investments to P2P Lending. I listed out the top five places you should put your money before even considering lending with Prosper or Lending Club.

Quick Tip: if you have not already signed up, use these links to Lending Club or Prosper for a free cash bonus upon account funding.

I received advice from the bloggers at Prosperous Land, Prosper Lending Review, Rate Ladder, Lazy Man and Money, and My Microfinance (link removed because website no longer available). So what advice did these bloggers have for newbie lenders?
[Read more...]

Filed Under: Getting Started, Lending Club, Prosper, Risk, Selecting Loans Tagged With: , , , ,

Blenders Borrowing-to-Lend: Earn money on good credit?

November 17, 2007 By 6 Comments

As I browsed Prosper loans, I was surprised at the number of community members who would like to use their good credit score to borrow money in order to reinvest the money in other P2P loans. This is called leverage and by definition it does increase risk. Is it a strategy that is likely to payoff?

The borrow-to-lend strategy was referenced before in an article on OmniNerd. As of this posting on the Prosper website, LeedsGirl (AA credit) is looking for $2,500 to reinvest in Prosper loans. Bpyatt is asking for a similar loan for $10,000 at 11%. MoneyDoc99 (AA credit) is borrowing money to reinvest as part of a Doctoral project. The list of people doing this goes on, and on and on. In fact, at least 5 of the 25 people who appeared on the first page of loans were lenders borrowing to reinvest in prosper loans. Another person on the front page is reinvesting in the Chinese stock market. The funniest part is the text of this loan request, which is already completely funded at 12%. Engle writes in his loan request:

I recommend this investment to anyone with $5,000 USD sitting around. The USD will continue to depreciate in the next few years… Since I do not have the capital to readily invest in foreign markets, I am request this loan to fund my “riskless” investment in the Chinese currency and market.

It sounds like he would also recommend this investment to anyone — even if they do not have $5,000 laying around to invest. I would certainly not call the investment without risk. If it was a “riskless” investment, it would pay the same rate of return as a US treasury bond. Maybe he forgot about the Asian financial crisis which occurred only about 10 years ago. I would question anyone’s investment acumen who calls an investment in single market on borrowed money “riskless.” Personally, I have been increasing my stock percentage in foreign funds due to the likelihood that the dollar will continue to depreciate, but it is certainly not a strategy without risk.

I am calling the strategy Borrow-t0-Lend, but many of the people on Prosper trying the strategy label the practice “Borrowing to Reinvest.” Other lenders call the people who borrow to lend “Blenders.” So is it a good idea to use your good credit score to lend to others with a lower credit score? [Read more...]

Filed Under: Borrowing, Risk Tagged With: , , ,

Signing up for Lending Club over Prosper (at first)

November 16, 2007 By 4 Comments

After doing a little tire kicking, I decided to sign up with Lending Club first. I have entered all the prerequisite data including the bank account number. The initial sign up was quick and required basics such as social security number to reduce fraud and because they will send a 1099 at the end of the year on interest earned. After a basic automated identity authentication, I entered my bank account information.

Lending Club withdraws a very small amount (under a dollar) from your account to validate the account information. To finalize registration, I must enter the amount withdrawn to validate that it is indeed my account. This process reminds me of the Paypal sign up process except Paypal deposits two very small amounts into your account rather than making a small withdrawal. Unfortunately, the process takes two to three days and it has only been 24 hours so it will be a few more days before I extend my first loans. I am growing impatient already.

So why did I pick Lending Club over Prosper for my first account? [Read more...]

Filed Under: Getting Started, Prosper Tagged With: , ,

Stanley Bing: Who is to Blame for the Subprime Credit Crisis?

November 16, 2007 By 1 Comment

Stanley Bing at CNN Money blogged about the subprime lending crisis and the falling dollar in his article “Who’s to blame for the credit crisis, the housing slump, the weak dollar, and the fear of recession? It’s a guy named Leonard.”

Yes, Bing, you have me interested. Who the heck is Leonard and why is he responsible? Of course, I am expecting a tongue in check answer from you, but let’s find out… Who is this guy Leonard?

It’s clear this whole subprime mess is much worse than anybody anticipated. Things are crashing. Stuff is burning. The best and brightest minds are at work on how to solve this crisis before it sinks the global economy into a hopeless morass that will plague us all for decades. No, wait. They’re the ones who caused it… I believe it is our duty… to pinpoint blame.

Bing goes on to “interview” the former head of a bank, an investment bank board member and a quant who all send him on the search for Leonard Flanken. Bing happens by Flanken [Read more...]

Filed Under: Risk, The Economy Tagged With: , , ,

Would you lend money to Britney Spears?

November 15, 2007 By Leave a Comment

Lending money to someone can be a difficult decision. The only two items that should come to mind are the interest rate and likelihood of repayment. Income should be factored into the probability of repayment, but there is more at play than is visible in a profile on Lending Club or Prosper. Take the example of Britney Spears’ lavish spending. Her monthly income is $737K but she has managed to save nothing and spends more than $100K per month on gifts and travel. Britney has a high mortgage payment, but would have a reasonable debt to income ratio. Risk is a much more complex decision than simply the Debt to Income ratio [Read more...]

Filed Under: Risk, Selecting Loans Tagged With: ,

Financial Risks in P2P Lending

November 15, 2007 By 1 Comment

According to Club Lending there are several types of risks in lending using Lending Club services. The risks listed are different from the traditional financial investment risks which are foundational enough to deserve to be addressed in a separate post. Below (in the quote sections) is the risk information provided by Lending Club:

Participating in any financial transaction carries elements of risk, and online person-to-person lending is no exception. We strive to create an easy, safe and private environment for people to bypass the banks and borrow or lend money at better rates. Below, we address the main types of risks associated with online financial transactions in general, and explain the measures we have taken to reduce these risks.

I agree with that statement because every investment carries general economic condition risk and inflation risk. However, other investments, such as money market savings or US government bonds, do not carry the same risk as participating in a P2P lending network. P2P lending lenders must carry [Read more...]

Filed Under: Getting Started, Risk Tagged With: , ,
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