Become your own Bank

Advertisements surround us showing great 1.05% interest rates on Certificate of Deposits (CDs) and savings accounts.  Meanwhile, the same bank is loaning your money for a personal loan at rates over 12% interest.  Doesn’t seem fair right?  Especially when you consider inflation, then you are just losing money by saving. 

So what can be done to curb this trend?  How about becoming your own bank?  The idea sounds expensive, but about a year ago I saw a report on a company called Prosper Marketplace who provided peer to peer lending.  The idea sounds simple enough, take out the bank and the barrower gets a smaller rate and the lender gets a larger rate.  On paper, everyone wins.  I was quickly excited to try this idea back then and I was hit with the problem of being stationed in a state who did not allow for peer to peer lending.  Just over a month ago, I saw another article on this company and decided to give it another shot to see if regulations have changed.  Unfortunately the citizens of this state cannot use the product, but instead Prosper has added a way to check a box if you are military and provide what state you are from.  Great! They have created a work around for those displaced due to military service.  So my account became funded.

Looking around the program, the interface is rather simple to use.  In a way it feels like Facebook as I browse the profiles of people requesting money for loans.  The reasons people need money are endless.  But like I said, this is like Facebook, and talk is cheap.  Prosper does require the lenders to provide a copy of their social security card, photo identification, proof of income, and other documents to prove the person is who they claim to be.  Additionally, the lender is able to see a current credit report on the borrower to see information such as delinquencies, credit card usage, inquiries, and credit score.

I would like to toss out a word of caution.  The website may attract investors to choose higher risk investments because of the high yields and deter investors from the safer investments due to the lower yields.  But the reality is that people can and will default on these loans.  Just like the stock market goes down, so can this investment.  It is not a sure thing. 

So what can you do to mitigate the risk?  There are plenty of blogs out there providing advice on how to play the game.  Some people talk about the character and sincerity of the person requesting the money.  At the same time they discuss not investing in people who do not provide information.  That may be your thing, who knows.  But again, my opinion is that talk is cheap.  I can ask for a loan to pay for my son’s college tuition, but then use it to go on a cruise.  I have discovered in my month as a Prosper lender an amazing site, www.lendstats.com.  This site allows you to query all of Prosper’s data since they converted to their current system.  Since this 3 years worth of data, and 3 years is the most common loan length, you can get a historical data on what is safe and not.   I by no means am giving advice on how to invest your money, but some things to look at are new borrowers to previous borrowers, numbers of inquiries, number of delinquencies, and so on to see how loans have performed.  Additionally, you can look at other users’ accounts and see how they have invested to learn from their successes and mistakes.  Or even see where you are going right and wrong in your own account.

An additional mitigation tool is diversification.  Prosper’s blog provides data reflecting since the change in their program three years ago, all lenders with over 100 notes have some form of positive growth.  Wow, 100 notes, which must cost a lot.  But actually it doesn’t.  The minimum amount you can pledge to the loan is $25, making it cost only $2500 to own 100 notes. 

To me, the process is painful at first, as I am big into the stock market.  I like to see my money change every second.  But initially, Prosper moves at a slower pace.  When a listing is posted it has fourteen days to collect funds from the lenders.  Once the loan is funded, it can take another seven days to have the borrow provide the required documents, and be verified by Prosper’s personnel.  So three weeks could potentially by before you can begin to collect interest on your investment.  But when you have a three year loan and average out the wait time, it becomes 51 weeks a year of interest.  Not so bad after the wait.  In fact the stock market is closed for holidays making the wait comparable. 

And additional wait is the fact you are investing into a loan.  The person receiving the money isn’t going to pay you back right away.  There becomes a 30 day wait before the first payment is due to you.  This is why I have decided to write this blog today.  My 30 day wait will come due on Friday and I will begin to collect my little bundles of money.  If you have over 100 notes, then everyday will be a pay day.

After this first month, I have learned a lot.  One thing to remember, this is like investing in the stock market.  Your intent is to make money.  Earlier, I mention people talked about the importance of what they place in the loan’s listing.  Personally I believe in historical numbers.  If you play the stock market on emotion, you will get burned.  If you invest on emotion, and not numbers, you will probably try to buy stock in Enron after Ken Lay said it was a good idea. 

I will continue to update on my success as a bank.  Please feel free to give it a try.  It is completely free to lenders and it is free for borrowers to list a loan. 

What does your credit report say about you?

Reviewing your credit report is the easiest proactive means to protect your identity, but for some reason it is rarely done.  We are bombarded with many advertisements informing us on FREE means of obtaining your credit score.  Unfortunately, knowing your credit score is insufficient to protect yourself against identity theft. 

So what is the difference between your credit score and your credit report?  Your credit score is a number used by creditors, such as a bank, to judge the level of risk to loan you money.  From this number they derive the interest rate at which you will be charged. 

Your credit report, on the other hand, is the information used to calculate your credit score.  Information on the credit report includes lines of credit, delinquent payments, and inquiries for credit.  What should you be looking for when you are reviewing your report?  The simple answer is anything you do not recognize as your usage.  When your identity has been jeopardized, the thief will open up lines of credit and not make any payments.  As you review your credit report, look for any inaccuracies so you can immediately contact the creditor about the potential fraud.   

Congratulations, you have decided to check your credit report.  Which advertisement should you listen to so you may obtain your free credit report?  You may be surprised, but the answer is NONE of them.  Instead, www.annualcreditreport.com was created to provide consumers with one free credit report from Equifax, Experian, and Trans Union each year.  Not every creditor reports to all of the big three agencies.  Therefore it is important to check your report from all three companies.

Before you go and pull all three reports at once, check out this little trick.  If you pull one report now, then wait 4 months then pull you second report.  After waiting 4 more months, pull the final report.  If you are counting months on your fingers, you will run out so I will do the math for you.  After waiting four more months, your original credit report will have been a year.  This means you can pull the first report again for free.  With this schedule, you will be able to pull three credit reports each year for free.

You work hard to build your reputation and as such it is important you protect it.

Identity Theft For Dummies - Amazon.com

Changes to the Thrift Savings Plan

Currently the Thrift Savings Plan (TSP) acts similar to a traditional Individual Retirement Account (IRA) in regards to the tax benefit.  TSP is currently working on phasing itself to provide a Roth benefit to TSP accounts which will make the accounts act similar to a Roth IRA.  Marines are currently able to take advantage of this transition.  Starting July 2012 civilian federal employees will be able to take advantage of the program.  Soldiers, Sailors, and Airmen will begin taking advantage of this program starting in October 2012.

For information on the Pros and Cons of traditional and Roth, please see the blog about IRA accounts.  Additionally consult with your accountant to see if the conversion is appropriate for your retirement goals.

TSP Investing Strategies: Building Wealth While Working for Uncle Sam - Amazon.com