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Can You Fund Your Own Lending Club Loan?

July 25, 2012 By Shane Ede 16 Comments

In order to be both a borrower and a lender at Lending Club, you have to open two accounts.  With two accounts, can your lender account fund your borrower account’s loan?

One of the things that I occasionally do to find new ideas to write about is to go through the referral logs and look at the search queries that have clicked through to the site.  One such query was “Lending Club can you fund your own loan”.

I want to be upfront with you.  I haven’t asked Lending Club for an official policy on this.  If I had to guess (which I’m doing now) I’d say that they don’t allow it.  At first, I couldn’t figure out why someone would even want to fund their own loan.  The only thing that I can come up with is to perform some sort of arbitration.  Saving some money on interest rates while paying yourself a bit of interest as well.

While that might sound like a good idea, it probably isn’t.  First, if you’re using the loan to pay off higher interest rate debts, you’d be better off just using the cash you’re planning on using to fund your loan to pay down the debt you already have.  Instant savings equal to the interest rate of the debt.  No need to worry about breaking rules, just instant savings.

The more compelling reason you probably don’t want to fund your own loan on a P2P lending site like Lending Club is all the fees and taxes you’ll end up having to pay.  First, you’ll pay an origination fee on the loan.  This could be anywhere from 1% – 5.5% of the loan depending on the credit “grade” of your loan.  Next, you’ll pay fees on every payment that you pay yourself, further eating into any advantage.  Finally, when tax time comes around, you’ll pay taxes on the interest income on the lending account.

The combination of the fees you’ll incur through Lending Club, and your effective tax rate will, in most cases, completely erase any benefit you might see from paying the interest to yourself.  It just doesn’t make sense.

So, can you fund your own Lending Club loan?  I can’t think of a good reason why you’d want to.

Want to know how I suggest you use Lending Club investing?  Check out my 2Q12 Lending Club results.

 

Filed Under: Investing, loans, ShareMe Tagged With: lending club, p2p investing, p2p lending, p2p lending club

How to Build, and Use, Rockstar Credit

July 17, 2012 By Shane Ede 12 Comments

Unless you’ve taken the vow of debt celibacy, you’re gonna need credit.  There’s plenty of reasons to have credit, and plenty of reasons to not need the debt instruments that determine your credit score.  Unfortunately, if you’re going to need credit, you’re going to have to make use of a few debt instruments in order to not only get a credit score, but get a rockstar credit score.

Building Rockstar Credit

Building a credit score isn’t particularly difficult.  Any Joe (or Jane) off of the street can get a credit score.  You’ve simply got to have some form of debt that reports your history with that debt to the credit bureaus.  Simple right?  Let’s move on to using your credit score then…  Or not.  Listen, getting a credit score is the easy part.  Getting a rockstar credit score is another thing altogether.  If you want to build a good credit score, you’ve got to know how to use the debt instruments in a way that demonstrates your credit worthiness.  If you want a rockstar credit score, you’ve got to have rockstar credit worthiness.

Know what goes into a credit score.

img credit: kspsycho83, on Flickr

Knowing what goes into a credit score will make it that much easier to build that rockstar reputation with the credit bureaus.  The factors that the bureaus take into effect vary a bit from one to another, but they have the same basic bones.  35 percent of your credit score is all about payment history.  There’s lots of factors in that payment history, but if you keep one thing in mind, you’ll never have a problem with this 35% of your score.  Pay on time.  If you pay on time, you will never run into any of the other things, like bankruptcy, length of delinquency, and amount of delinquency.  Frankly, it’s the easiest part of your credit score, because you can pretty much nail it down with a good bill pay system.

Another 30 percent of your score is determined by the amounts owed.  That is, the category of things that falls under amounts owed.  This includes the total amount you owe, but also includes things like the number of accounts with a balance, the amount of available credit, and even the type of debt you owe.  What this category boils down to, is a score on utilization.  If you’ve got nothing but credit cards (unsecured debt), and you’ve got nearly all of them maxed out, the chances of you defaulting in the future are higher, and so, you’re score goes down.  If, on the other hand, you’ve got a mortgage (secured debt), a car loan (more secured debt), and a few credit cards with low balances on them, your chances of defaulting are lower and your score will go up.  Of all the factors that go into your credit score, the amounts owed factor is the most complex and hardest to balance.  If you’ve got the patience, some experimentation with available credit, types of credit, and distribution of credit can yield some interesting changes to your score.

The remaining 35 percent of your score is split (15%-10%-10% respectively) between length of credit history, new credit, and types of credit used.  The first, length of credit history, takes into account how long you’ve had your credit accounts open, and how often you use the accounts.  New credit takes into account how much of the credit you have is new to you.  In short, how many new accounts you’ve opened, and how many times your credit report has been pulled by a potential new creditor. Finally, the types of credits used category takes the type of accounts you have and scores your usage based on that.   Unlike in the amounts owed category, the types of credits used category doesn’t take the balances on the accounts into consideration, but merely weighs the ratio of one type of account against another.  With all three of these categories, the emphasis is on smart credit usage.

The bureaus want to give the best credit scores to the rockstar credit users.  A rockstar credit user is someone who pays their bills on time and is never late, has “good” balances on their credit accounts with a higher ratio of secured debt versus unsecured debt, has a long history of being a rockstar credit user, isn’t actively trying to open a whole bunch of new accounts (and hasn’t recently added a whole bunch of new debt), and isn’t overusing any one type of credit.  A simple rule, to fill all of those requirements, is to just be a smart person with your personal finances.  Don’t take on more debt than you can afford, and make the payments on time.

Tools for Rockstar Credit

Along your journey to building rockstar credit, there are some tools that you will want to use.  The first, and most important, is your free credit reports.  You can get one per year from each of the three major credit bureaus.  A smart way to use them is to get one from one of the bureaus in one quarter, one from the next the next quarter, and then once more in the third quarter of the year.  While the free credit reports don’t include your FICO score (credit score), they do show you all the information that the major credit bureaus are using to determine your score.  Look over them carefully, and make sure that any inaccuracies are fixed, and reflected the next time you pull the free report.

The second tool (really tools) is to have a full complement of programs and apps to help you along the way.  A good bill-pay system is beneficial to keeping your payments on time, while programs like Mint and Adaptu can help you keep track of where your money is going, and keep it all under control.

If you want more detail on what makes up your credit score, I encourage you to check out The Beating Broke guide to Your Credit Score. (it’s FREE)

Using Rockstar Credit

Ok.  So you’ve got a rockstar credit score.  Now what?  Well, we didn’t spend all that time building a solid credit history to not use it, right? Right.

Depending on where you are in your personal finance journey, you will find that there are certain benefits to having a rockstar credit score.  The main key, when using your credit, is to remember that your usage will reflect on your credit score, and use it accordingly.

Negotiating a better interest rate.

If you’ve managed to improve your credit score by quite a bit, one of the first things you should try and do to take advantage is to negotiate a better interest rate.  In most cases, this will be done with your credit cards, but it sometimes doesn’t hurt to call other creditors as well.  Call them, explain that your credit score has gone up significantly, and you’d like your interest rate lowered.  One of the advantages of having a great credit score is that you have some leverage in that you are more likely to be able to secure a balance transfer to another card at a lower rate.  If the creditor won’t lower your interest rate, consider trying to find a new card with a good rate and a good balance transfer rate.

Use your credit to leverage debt.

This usage is likely to get a few comments.  It’s frowned upon a bit, and can be dangerous if not done properly.  Further, it can be dangerous in that you can over-leverage and end up losing everything if it falls apart.  Which makes it all that more interesting, and something to learn about, in the same way that learning about pyramid schemes helps avoid them. 🙂

Leveraging your debt comes in many shapes and methods.  The easiest way is something you’ve probably heard about before.  Using low balance transfer rates and low introductory rates, you can use the credit to earn income on the money.  Several years ago, this was very popular as people were getting transfer and intro rates of less than 2%, while online savings accounts were earning more than 5%.  It didn’t take a rocket scientist to figure out that a person could earn 3% on the credit card company’s money with little to no work besides making sure that the payments were made and the debt was paid off at the end of the rate period.

A similar method, that is a bit more popular today, is to use the transfer/intro rates and lend the money out on something like the peer-to-peer lending site Lending Club.  With return rates of 13% possible, it could be a lucrative proposition.  It would require extremely good investing, and a good amount of luck in avoiding delinquencies and write-offs however.

Another way that you will see used more often is to use the debt as a means for investment into assets.  If you can get a card with a large enough limit and a low enough transfer/intro rate, you can then use the money as a down payment on an investment property (think rental property).  I shouldn’t have to tell you this, but there are a lot of people around the nation (and the world) who got burned in the last 5 years by using this method.  To be honest, I wouldn’t use it, but it is a method that is available to you.

I’d like to reiterate that leveraging your debt can be dangerous.  A market downturn, or sudden loss of income can not only ruin your leverage attempt, but can also quickly send you into a spiral that could lead to bankruptcy.

Keeping Rockstar Credit

Keeping rockstar credit can be super easy.  If you’ve got rockstar credit, you’ve already mastered the steps to building a good credit score.  Keeping a good credit score calls for more of the same.  Yep.  Just keep on doing what you’ve been doing while building your credit, and you’ll keep it.

Filed Under: credit cards, Credit Score, Debt Reduction, General Finance, Personal Finance Education, ShareMe Tagged With: building credit, building rockstar credit, credit, credit cards, Credit Score, lending, loans, rockstar credit

Breaking Your Money Superstitions

July 13, 2012 By Shane Ede 7 Comments

Did you know that when you were born, the only things you were afraid of were loud noises and falling?  It’s true.  Anything else is a learned fear.  Now, it may be true that you can learn a fear at a young enough age that you won’t actually remember where the fear originates, but it’s still a learned fear.

Stop and think about that for a minute.  What are some of your fears?  Each and every one of them is a learned fear.  And if something is learned, it can be unlearned.  Or, at least corrected with proper learned knowledge.  Take today for instance.  It’s Friday the 13th.  Well known as the day of bad luck.  Walking under a ladder today, or breaking a mirror today is double bad luck.  Isn’t it?  Well, it’s something like that, I’m sure.

Superstitions and fear have done their fair share of damage throughout the years.  The first good example that comes to mind would be the Salem witch trials.  All those innocent women burned at the stake.  It’s especially heinous when, after watching The Wizard of Oz, everyone knows that you pour water on a witch if you want to get rid of them.  Less mess too.

Merry Crisis and a Happy New Fear by Robinsoncaruso, on Flickr

Seriously, though.  Your superstitions about money, and fears about money are learned.  Somewhere along the way, you decided that the superstition or fear was a valid one to have.  Money superstitions are just as much hocus pocus as crazy Quaker witches.  Today, Friday the 13th of July, 2012, take a few moments to really think about the superstitions and fears that you apply to your money.  Then, do something small that goes against those fears.

Have a fear of losing it all?  Take a handful of change down to the river or lake and toss it in.  It’s not everything.  Just some random bits of metal in a circular shape.  Not only can you make more, but you’ll likely get along just fine without it.

What are your money fears and money superstitions?  Share them below, and let’s all compare and see how common some of them are?

And remember, there are babies all around the world being born today that have none of them, until we teach them to them.

Filed Under: Children, Financial Miscellaneous, ShareMe Tagged With: money, money fears, money superstitions

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