Lazy Man and Money

Lending Club Performance Update

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I decided to take a minute or two today to look at my Lending Club (Lending Club Reviewed) account today. For the most part, I don’t log in too often. I have to admit that I made some poor choices on loans on Prosper in the past and I’ve been waiting for the shoe to drop on Lending Club. Here’s the interesting thing… Lending Club has outperformed all my other investments this year. Check out my Lending Club portfolio:

Lending Club Performance
Lending Club Performance

So you are probably asking yourself this, “What makes LendingClub different?” I’m not 100% sure, but it could be because I took loans with relatively low risk. I erred on the side of caution after realizing that I took too much risk with Prosper. I also think that Lending Club typically has stricter standards for getting a loan. Maybe I just got lucky with the loans it put me in.

In any event, 59 loans paid off or in good standing out of 60 is pretty good. Even the outstanding loan paid me for a couple of months, so it’s not total loss from that person (just close to it). Perhaps P2P Lending has some legs to it after all.

Zopa Scam? I Borrowed Money On Zopa. Here’s Why…

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A couple of weeks ago, I went to Finovate Start-up to learn whatever I could from various financial company start-ups and report back to you. I hoped to find three or four gems in the 40 companies that presented. One of the companies that I was least interested in was Zopa. In the UK, Zopa is a very successful peer-to-peer lending company. This lead to their widely anticipated US release. When the product was introduced, critics universally panned the service. For the investor, Zopa is basically a CD – you get a guaranteed fixed rate of return. For the borrower, you get a loan without ever having to deal directly with a bank. There simply didn’t see anything “Finovative” about the company.

At Finovate, they reinvented their reputation. By the end, they had one the coveted award of Best of Show. I was stunned. How did they do it? Borrowers can pay negative interest rates.

Let me repeat that, because it took me a bit to wrap my head around it… you can pay negative interest rates. How can that happen? When someone invests in a Zopa CD, they choose a borrower to help. This “help” reduces the rate that the borrower has to pay back. Zopa showed a couple of examples where borrowers are paying negative interest due to all the help they’ve received.

So if the borrower can make negative interest, the investor must be getting the short end of the stick right? Not exactly. A Zopa CD pays 3.75%, which compares well with the US Avg (2.90%) as well as the Top 10 US Bank CDs (3.65%) (source: Bankrate.com, 24-Mar-2008). The Zopa CD is insured up to $100,000, so it’s a steady investment if you like the returns on a CD.

I didn’t need a loan, so why did I get one? I have often written about peer-to-peer lending. I created the Carnival of P2P Lending. I felt that it would be interesting to be on the borrowing side. Most importantly though, I wanted to experiment to see if I could achieve a negative interest rate. If I can’t achieve a negative interest rate through connections like you, the odds are very long against the average Joe doing it. So the results of this experiment lie in the Lazy Man community… If you want to help me achieve a negative interest rate simply visit my Zopa profile and click on the Help Me Now button. I put up my favorite YouTube clip and a couple of pictures on that profile for your enjoyment.

Before my wife reads this and I get a nasty phone call… Honey, I only took a $1000 loan – the lowest amount possible. I got the lowest possible interest rate 8.49%. This means that if I keep the loan for a full year, I’ll pay around $85 to run this experiment. If I don’t receive significant help in 6 months, I’ll probably cancel the experiment and declare the negative interest rate hype and not something that one can expect. I’ll also keep the money that I borrowed in an interest bearing account, which means that it will cost less than $85 in total. With our net worth, income, and spending, this doesn’t really amount to much. One could even claim that it was worth it to realize that I was able to get the best interest rate that Zopa has to offer despite being self-employed.

Carnival of P2P Lending #9 – Cinco de Mayo Edition

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Happy Cinco de Mayo! In a few hours from now I’ll be having tacos and maybe a cerveza. I draw the line at doing a hat dance. Grab yourself some nachos and chew on these articles about P2P lending…

Moolanomy spectulates why Lending Club has stopped taking new lenders. Interesting thought that “If they are successful, I believe they will emerge as the industry leader.” I think Prosper already has a head start on Lending Club, so I think they’ll just emerge as a stronger #2 than before.

Not to be outdone, Cash Money Life speculates on the future of Lending Club.

Prosper Lending Review tells you how you can buy your own P2P Lending company. I’m guessing that it’s not going to come cheap.  I wonder if my credit score is good enough to get a loan on Prosper to buy it – just kidding.
Wiseclerk covers the launch of Cashare in Switzerland. It’s similar to Prosper except that you have to submit paperwork for each loan.

The Prosper Blog notes the value in social capital in getting a loan funded. I’ve got more to say about this in the future – perhaps later this week.

RateLadder says that with the Fed dropping interest rates, buy a Zopa CD. It seems like you might even be able pay your loan back at negative percent if you can convince people to help you.

Lending Club is Dead

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[Update: It looks rumors of Lending Club’s death was premature. It was actually my best investment last year. You can sign up at Lending Club.]

lendingclubrip.jpgI, like many other Lending Club members, received a distressing e-mail a couple of days ago (Lending Club Reviewed). I waited until now to sort out how I feel about things. Here are the highlights that I found interesting:

Lending Club has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future. Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders… The borrowing side of our site will remain generally unaffected by this registration process; borrowers can continue to apply for loans and new loans posted after April 7, 2008, will be funded and held only by Lending Club… Until the registration process is completed, the company will undergo a quiet period and will not be able to respond to press and other inquiries about Lending Club or the registration process during that time.

In other words, they are shutting down the peer-lending service. They either are not willing to or unable to explain in more detail how long this may go for. The part about Lending Club fulfilling all borrow loans themselves is concerning. What happens if people don’t pay them back, will the company go out of business? Will they have to fill every borrower’s request that comes to their door? If not, how do they choose who to fund?

The biggest question is, “How long will everyone be in limbo?” Tech Crunch suggests that they might need to obtain a broker-dealer license from the SEC that would legitimize its operations. If this is the case, it might be quite a few months. You don’t just get a broker-dealer license from the Dollar Menu. There are regulations on top of regulations.

I am incredibly disappointed by this news. I ran a contest less than two weeks ago and gave away Lending Club memberships with $50 just for signing up. I will be pulling my money out as fast as possible. It makes no sense to leave it there since you can’t lend it and it earns no interest.

I have been worked for a number of start-up companies and they had one thing in common – they are extremely fragile. A high percentage of new companies fail. Often times they do everything right and the market conditions or something else just isn’t right. In this case it looks like Lending Club has the right market conditions, but something internally just isn’t right. I’ve talked to a few other Lending Club members – smart members who probably could have helped Lending Club avoid this problem in the first place – and they said they are gone and never coming back. They feel their trust has been violated. With each day that Lending Club can’t or doesn’t say anything to justify this inactivity, the more trust is lost. I might be blowing this out of proportion, but I’d rather err to the side of being conservative until I have reason to believe otherwise.

Note: I don’t believe this affects Prosper.com. The lenders do have promissory notes from the borrowers. Furthermore, Prosper has filed with the SEC for a loan resale marketplace, which tells me they are cooperating with the SEC’s requirements.