Unlike many others that simply use an affiliate system to display CD rates, ours was custom developed in-house and updated on a daily basis. What makes our service unique?

• Search for CD rates available nationally or local to your area based upon your zip code
• Not only just banks but credit unions
• With local banks, displays the local branches within your area
• Twitter and Facebook notifications of rate changes
• Blog updates of bank promotions not discussed anywhere else

For many of my personal finance blogger friends, I have developed free widgets you can install on your web site.  As of today I’m proud to formally announce the new web site, and hope you find the service useful.  Please tell us what you think, and look forward to any constructive comments to help make the service better.

Related posts:

1. Expect Even Lower CD Rates
2. Weekend Reading for December 26, 2009
3. Payday Loans VS. Loan Sharks

On a web page sponsored by the payday loan companies they discuss the myth’s vs. realities of payday loans.  Obviously their statements are somewhat biased, and should be taken with a grain of salt.  Out all of the myths the one that caught my eye was:

Payday lenders’ high fees help the industry make billions in profits.
Small denomination, short-term loans are very expensive to originate and maintain, which is why most banks no longer offer the product. According to the Federal Reserve Banks 1999 Commercial Bank National Average Report, the cost for a small bank to originate and maintain a loan for one month is $174.

Industry critics fail to recognize that, in addition to the cost of administering the loan, payday lenders incur the normal overhead costs of running a business and paying employee salaries and benefits.

A study by the FDIC Center for Financial Research found that “operating costs lie in the range of advance fees” [collected] and that, after subtracting fixed operating costs and “unusually high rate of default losses,” payday loans “may not necessarily yield extraordinary profits. ”

Of course government leaders and the mainstream media like to vilify these companies, when in reality they are offering service to a previously ignored market.  Traditional banks stopped offering services to this group many years ago.  After all, in a free market economy, who decides if a business should stay in business?  The buying public at large.  A business couldn’t exist if it didn’t have customers who want their service.  Furthermore, if another business can offer better service (in this case a lower APY) while staying profitable, some other company will find a way to do it.  This is what competition, and the free market is all about.

Who are the customers of these payday loans, and the related industry of check cashing?  Usually lower income individuals, who either do not have the documentation (remember the Patriot Act makes banks document all accounts), or people who cannot get overdraft protection or credit cards.  These individuals are categorized as subprime borrowers.  Just like businesses with a higher risk to default on their bonds (otherwise known as junk bonds), individuals also fall under this category.  It’s interesting to note a few studies about junk bonds returns.  While the rates are high with junk bonds, the effective returns have been shown to be much lower.  Could the same apply to sub prime borrowers?

What’s the Purpose of Charging Interest?

I grant you 400% effective interest rate mentioned in the article is insane.  I do think imposed limits of 36% are somewhat fair with no direct experience in the industry.  After all, if you had a traditional bank account with overdraft or a credit card you should be able to get rates lower than 36%.  In the end though, the borrower, as long as the terms are clear, should be able to charge whatever rate they deem appropriate.  They are taking risk by giving out the loan, so they should be best qualified on what rate to charge.

Getting back to Puffington Post article it’s quite interesting some of the comments made.  The funniest and inane comment was:

The poorest of the poor shouldn’t pay any interest, they need every dollar. Risk could be managed
the way it is now, with re-payment history and credit limits.

There are two reasons why interest exists on loans:

• Time is money
• Risk to default

That’s it.  Nothing else matters.  In a perfect world everyone would pay everyone back, with on-time payments and in full.  If this was true, would this mean all loans would be at 0% APY?  No because you as the lender have a choice over other investments that would generate higher returns.

Time Is Money

This is one of the basic laws of money. Time is money, and money is time.  Having money in your hand now is worth more than in the future.  If you loan money out you expect not only the principal, but also interest.

Risk To Default

We obviously know in the real word that the faith of someone paying you back in full does not always happen. Payday loans are of the unsecured type.  In simple terms this means no asset, like a car or house, is tied to the loan should the borrower default.  With loans tied to an asset, you as the lender at least stand a chance to recoup some or all of your principal back.  If the borrower defaults on  an unsecured loan,  how can the lender make up for the loss?  A lender has only one of three ways:

1. Take a loss on your loan
2. Charge you a higher interest rate based upon your risk to default
3. Charge everyone else a higher rate to recoup the difference

So what is a lender to do in order to ensure they still make money lending?  They do one or all of the above items. TANSTAAFL (There Ain’t No Such Thing As A Free Lunch).  With my Lending Club experience, I can attest how this works.   If a person asking for a loan has defaulted, has little credit history, or cannot verify income I expect a higher interest rate on their loan.

By increasing regulation of the industry, similar to what happened during prohibition, it will go underground. The demand for these types of loans will not disappear because of increased regulation.  If you cannot get a loan via traditional means, you’ll contact real loan sharks (you know the Paulie Walnuts type).  With a loan shark you might even get a better rate.  Getting two broken legs or cement loafers is a great incentive to ensure prompt and full payment.  Bada Bing!

Readers: What do you think about payday loans? Have you ever taken one out?

Related posts:

1. Expect Even Lower CD Rates
2. Lending Club Review – How to Become a Bank
3. Performance Update For Lending Club
4. A US Debt Limit that’s Unlmited?!?

Bad for the Banks

As mentioned in this CNN blog post, “It’s not uncommon for a struggling bank to ratchet up interest rates on its deposit accounts as a way to attract capital.”  It’s in fact it’s the primary tool they can use to attract customers. How else can a bank attract customers? By offering free toasters?  By restricting a badly capitalized bank, the rate in which they can offer their products, doesn’t this make it that much harder for a bank to increase their capitalization?  If they can’t get the capitalization, won’t this make it harder for them to become a healthy bank?  It can be a vicious cycle.

You may think the FDIC was created to help the consumer, but in reality it’s helps the banks. Rulings like this are solid proof they do nothing to help savers.  Let’s look at the FDIC from the banker’s perspective.  If you could make loans and investments without the fear of failure, would that change your risk for investing?  With the FDIC in place, banks can make riskier investments.  They know the FDIC will rescue their customers, should they make fatal errors.  It’s a moral hazard for banks and the surviving banks pick up the tab.  With 140 banks that failed in 2009, the FDIC is woefully under-capitalized.  More than likely, the FDIC will require the “good” banks to prepay three years of FDIC insurance.  This is the classic economic term “There ain’t no such thing as a free lunch” (TANSTAAFL).  Like in physics, every action has an equal and opposite reaction.  The healthy banks will have to react to the FDIC prepayment to ensure they themselves stay healthy. The possible situations:

• The banks let it eat into their profit margin
• Forces banks to increase their fees to customers
• Lowers the interest rates banks offer on their products

More than likely #2 and #3 will occur.

Bad for Savers

This makes things even worse for savers.  Yet again our government is punishing savers in the end.  This is either forcing savers to eat into their principal, or invest in riskier assets.  This is no accident and has an ulterior motive.  Though you won’t find any formal proof, this was done on purpose by the FDIC and the Federal Reserve.  What’s the reason behind this?  It forces investors to take their money and move into other assets, such as stocks and bonds. Though not the primary cause, the current low bank rates assisted in the re-inflation of the stock market.

Investing in these low return bank investments are in reality very risky.  You might be thinking, “Risky? How can a fixed 1.98% CD be risky?”  The issue is your real rate of return.  Just trying to beat or match inflation becomes very difficult.  As I state with my 4% investing rule, I won’t add any new CDs to my security bucket, and will seek other investments when the existing CDs mature.  You definitely have other options that offer higher rates of returns with not as equal increase in risk.

So Suze tell me how FDIC insured bank products are a risk free investment?  Every investment has risk, even FDIC insured investments. Suze is correct though; it might be risk free to the consumer owning an account with a failed bank.  Should the bank fail, you will get your principal back.  The issue is, with current interest rates, you run the risk in real dollars (that’s after inflation) of loosing money.  The additional issue, someone has to pay for the failed bank.  After all, a bank fairy does not exist.  With FDIC requirements expect lower returns, and higher fees from the surviving banks.  In the end, other investment options might be worth looking into.

Related posts:

1. Lending Club Review – How to Become a Bank
2. The 4% Rule to Investing

Mint.com

Mint is a FREE online personal finance (web 2.0) service similar to Quicken.  Mint was recently acquired by Inuit for ah… mint.  I decided to look at Mint to see what the buzz is about.  For the past 6 months I’ve taken mint.com for a test spin with my personal finances.  With Mint you have local software to install and is a service you can access with any web browser.

I currently manage my finances by using Quicken. I’ve been an Intuit Quicken user since the MS DOS days.  For the youngsters reading this blog, that’s for over 18 years.  I can’t say I have my finances since then (it would be neat to see my savings in 1993 when I graduated college).    Unfortunately 7 years ago I lost all of my data from a bad backup.  From MS DOS, I’ve since moved up the evolutionary operating system food chain to Quicken for Windows.  I run it in a VMware Fusion instance on my Apple OS X computer.  For the non-geeks out there, I do this because Intuit’s Apple Macintosh version isn’t worth using.  Let me be clear about this, Quicken for OS X has always been the bastard child.  I won’t even consider it an option for managing my finances, for the many reasons mentioned by commentators on Amazon’s site.

Using Mint

Mint was a breeze to initially sign up and add accounts.  I chose 10+ accounts, a mixture of banking, credit cards, loans and investing.  All accounts seamlessly downloaded my online data.  You might be asking, “how does Mint make money from this free service?”  Mint makes their money by offering ways to help save, or make you money by recommending various financial services.  Mint seems to be more focused on catering to the masses.  It appears very strong on the budgeting and tracking expenses.  It’s investing area, while dedicated, seems somewhat simplistic.  Like most of Mint, it is much simpler than Quicken and lacks it’s many features.  With the acquisition of Mint, it’s obvious it’s the future of the Quicken product line.  Intuit’s current online version of Quicken was not much of a success and I assume it’s the reason why they purchased Mint.  In addition, Microsoft discontinued Money this year so there aren’t many other games in town.

Great Features in Mint

• Weekly summaries via Email
• Alerts via Email or SMS page.  Will alert on pending bills and ways to save money on transaction fees.
• Mobile access via the FREE iPod Touch/iPhone version.  It provides you with a great snapshot of your finances.
• Automatic download of account transactions

Issues with Mint

• Lack of advanced features (though they are catering more to lower end users).  Their investing section seems OK at best.
• Security.  I understand their security setup.  What concerns me is the centralization of so much data by itself. This can be very useful for a hacker.
• Backups.  With many web 2.0 services, you are relying on them to perform proper backups.  While in this case no critical data can be lost (account data is stored with the bank), but setup of categories, alerts are stored with Mint.
• Assignments to income/expense categories are not always correct, and sometimes-manual intervention is needed.

Is Mint Secure?

I think locally installed applications like Quicken are going the way of the Dodo bird.  I know, call me old fashion, but I like having all of my data locally within Quicken.  I do think a hybrid, of local and remote application via sites like Mint is the future of this industry.  Since I’m in the technology industry and deal with security all the time, I know the risks of leaving security to a third party.  I’m not saying Mint is insecure.  Of course for Mint that is their biggest adoption road block and addresses it quite a bit in their forums.  In some ways I have also outgrown Quicken.  Recently, I’ve been creating Microsoft Excel spreadsheets for managing parts of my portfolio.  Specifically I manage our precious metals, and security bucket (which is primarily fixed income).  Quicken, or any other application for that matter, don’t seem to have tools to help manage these areas of your finance.  I wind up transferring the total amount into a Quicken asset account.

Summary

Mint is great for creating and tracking your budget.  It’s great you can get alerts via Email to ensure timely bill payments.  It’s unfortunate that Mint’s investing area is very week for all of but the basic investors.  Mint unfortunately does not have many of the great features Morningstar has to help create good balanced portfolio.   While Morningstar’s service is great (I myself use the service), it charges a yearly subscription fee.  It might be possible for Mint to figure out a way to offer the same services for FREE.  For me, I’ll keep using Mint for it’s basic budgeting features.

Related posts:

1. Lending Club Review – How to Become a Bank

UPDATE: Lending Club Performance

Did you ever wish when applying for a bank loan, that you were the loan officer sitting on the other side of the table?  Well now you can with peer-to-peer (P2P) lending services like Lending Club.  They offer a higher rate of return (over 9.6%) than many other traditional investments and you have some ability to manage risk.  It’s similar in class to bonds, but is more like if you owned a bank and were the loan officer.  You determine which loans you want to approve, and which ones to pass on.  Sounds interesting?  Keep reading for more details.

Borrowing from Lending Club

Loan applicants visit LendingClub.com and apply online.  They must have a FICO score of above 660, which is above the subprime loan category.  Over two-thirds of applications get rejected by Lending Club, so only a small sub-set of individuals get approved, and is part of the risk management they perform.  Borrowers can apply for a loan from $1,000 to a maximum of $25,000.  The interest rate is determined by Lending Club and based upon the applicant’s credit rating.  The interest rate and term is a fixed 3 year loan, and currently do not offer any other loan terms.  All loans are unsecured lines of credit and no different than credit card loans.  Also like credit cards, any defaults are reported to the three credit rating agencies (Equifax, TransUnion, and Experian).  For more of a borrower’s point of view, visit the web site DebtFreeAdventure.

Investor Requirements

Since this is a blog about investing, lets discuss how to get started. Do you meet Lending Club’s investing requirements? Here are the requirements:

• Income Level – In most states, you must have a gross annual income of $70,000 or more and have a net worth of $70,000 or more.  In the state of California, investors must have a gross annual income of $100,000 and a net worth of $100,000.
• Approved States – You can invest if you are you a resident of: California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Kentucky, Louisiana, Maine, Minnesota, Missouri, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, West Virginia, and Wyoming
• Net Worth – If your total net worth is great than $250,000, there is no annual income requirement.  In the state of Kentucky, investors must qualify as an “accredited investor” under the securities act.
• Asset Allocation – Lending Club investors must not deposit more than 10% of their net worth in Lending Club notes.
• $25 – Only $25 is needed to start.   If you sign up now with Lending Club they will give you an additional $25.

The sign up process as an investor is simple and takes a few minutes.  You can fund your account either via an electronic transfer from your bank, mail in a check, or for instant availability use PayPal.  In my case, I choose PayPal to fund my account, so I also get credit card points.  Once setup, Lending Club has the requirement you must invest at least $25 per note.  Notes are graded from A1 (lowest risk/lowest rate) to G5 (highest risk/highest rate), with sub grade per rate.  As of December 7th, 2009 the rates are as follows:

Once you review and pick a loan it will take a few days before it’s completed.

Investing Strategy

Scott Langmack of Peer Lending Wealth, has an interesting perspective on how to maximize your return, yet minimize your risk.  To summarize his info:

• Look for someone who has a job for a long time (10 years+ being ideal)
• Hold some sort of government position
• Has a low debt to income ratio.
• Go for primarily people looking to pay off higher interest rates, than the more riskier types of loans (like new business)
• Build up a portfolio of at least 200 notes.  The more notes, the more even your portfolio’s performance.  This helps spread the risk out to many loans, should one default.  This then means a recommended minimum of $5,000 to invest.

Let me add to Scott’s recommendations.  First of all, like Scott, I do not use Lending Club’s automated investment tool.  I manually select the notes I wish to fund.  I filter my selection of notes by the following:

• Loan Purpose – I tend to focus customers looking to get a better rate and reducing their debt
• Minimum Length of Employment – greater than 1 year.  The longer the employment the better
• Maximum Debt-to-Income Ratio – 30%
• Credit Score – greater than 678
• Interest Rate – All.  Though I trend towards selecting the higher rates.  You should own a mixture of loan grades to help increase returns.
• Delinquencies (Last 2 yrs) – none
• Reviewed by Lending Club – Yes. I preferred lending club has checked them over.  It gives a better chance the loan will complete and information is legit.
• Verified Income - Yes.  At least as the initial filter.  I also look at unverified income applications.

While I do make exceptions to the filtering, I tend to look at the big picture.  The question you should always ask, “Will the individual pay back the loan?” and “Are they a good credit risk?”.  If you have any doubt in an application, skip it and find a better one.  If currently no good application exists, wait a few days and check again.  There is no need to rush the process and take your time picking what you consider the cream of the crop, then getting stuck with a bad note.  Lending Club themselves has plenty of statistical information and so does LendingClubStats.com.  Analyzing borrowing trends is something I recommend.

Secondary Market

Should you want to unload a loan, there is a secondary market from FOLIOfn.  This is great if you have an bad performing loan or need cash for other investments.  It’s also a great way to pick up notes from others selling.

Possible Risks

With any investment, even “secure” ones, you have risk.  In summary here are some possible risks with investing in Lending Club:

• Investments are not FDIC insured
• Similar to bonds since it’s a fixed rate, you have the risk of inflation eating at your returns.  Though at the high rate of return, this is minimized.
• Lending Club’s yearly fee is 1%, this rate has already increased from I believe the initial 0.5%.  This fee could increase in the future.
• Loans can be paid in full early and affect your return.  The downside is you will need to find another loan to replace it.
• The SEC filing shows Lending Club invested $2.4 million from October 2008 to March 2009 to co-fund loans.  This represents 24% of loans funded during that period.  What happens to new loans if Lending Club does not invest?
• If you have a small amount of loans, (under 100) one default can dramatically affect your overall return
• Lending Club will properly price the borrower’s risk to default.

With the last issue, you can minimize this risk by specifically picking the loans you want to fund.  You don’t think it’s a good loan? Don’t invest in that note.

Taxes

Lending Club investments are NOT considered passive investments by the U.S. Government.  This means you cannot get long term capital gains tax rate.  Therefore the IRS taxes any profit as ordinary income (unlike stocks).  Lending Club investments might be best suited to a Roth IRA retirement account.  I currently have my investment in a taxable account, but Lending Club does offer IRA accounts.  To open an IRA a $15,000 minimum is required.

Current Results

I started with Lending Club this year (May 2009), and put $1,000 ($925 deposited, $75 in sign-up bonuses) into my account. As of today, my current performance is 10.45% with 24 loans.  I have it as a small part of my security bucket.  Believe it or not, my performance from my peers in Lending Club is in the 39 percentile, not great and I hope to increase in the next year, with better note selection.  The average return is 9.67%, and I’m in that most common grouping.  I currently have no defaults, and monitor my loans closely.  Based upon Scott’s results, defaults tend to increase up to the 18 month mark and quickly decrease after that hump.

For next year my goals are:

• Adding an additional $2,000, with the final goal of $5,000
• Invested with 100+ loans.
• Perform this over a three year period and invest a little at a time.  This allows me to closely watch my returns, and smooth out returns at the same time.
• Searching the secondary market (FolioFN) more for any good loans to acquire.

Disclosure: I have $1,000 invested into Lending Club loans.

No related posts.