Techcrunch has an article today about a new peer-to-peer lender for student loans called Fynanz. According to the lender FAQ, they will guarantee 50-100% of the loan if the borrower defaults. There are a few reasons why I have my doubts that Fynanz will work:

• Interest rates on student loans tend to be pretty low. It will be difficult to attract students to Fynanz, when they can just get a traditional student loan at a lower interest rate.
• If the rates do get bid down low enough to compete with traditional student loans, the rates may not be high enough to attract investors, even if a minimum of 50% of the principal is guaranteed.
• As with traditional student loans, the term of the loans are long. At a glance, I looked at some of the loans and I saw them ranging from 10-20 years. This is an extraordinarily long time for an investor to lock up money in an illiquid investment. They will need to eventually provide a secondary market to provide liquidity, otherwise they will most certainly be doomed to the deadpool.
• As with traditional student loans, borrowers have the option to defer payments. Many investors won’t like the idea of waiting for up to several years before receiving their first payment.

Time will tell if Fynanz will survive, and I will certainly be watching with great interest.

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I was talking with a friend that recently purchased his home with an ARM and did 100% financing. With little (or possibly negative equity with home prices dropping), he will certainly have a very difficult time refinancing into a fixed-rate when his rate begins to adjust. As it so happens, his mother-in-law recently inherited a large sum of money. More than likely he will end up borrowing from her and refinancing his mortgage with her. I told him I think it is a great idea, and it is basically peer-to-peer lending on a grand scale. Here are some of the many benefits of borrowing from a friend of family member:

• Very low closing costs

Basically you will just have to pay the local and state government some fees (doc stamps, taxes, recording fees, etc.) for the documentation.

• Quick recovery of closing costs

Because of the low closing costs, it won’t take very long at all to recover your closing costs. It will likely take on the order of a few months as opposed to years with a traditional refinance.

• Low fixed rate

Your friend and relative may even be kind enough to loan to you at 0%, but a fair rate would be something between that of a standard 30-year fixed loan with an institution (assuming that is the term you use) and the interest rate of a high-balance money market account.

• Potentially higher cash flow for borrower

Depending on your current financing situation, because of the lower rate, the refinance may leave more money in your pocket each month.

• Potentially higher cash flow for lender

If the interest rate is higher than that of a high-balance money market account, the lender will enjoy better cash flow as well. Technically speaking, the amortization of the loan will also provide increased cash flow. However, it isn’t additional income since it is additional cash going towards the balance and the balance of the loan (investment) is declining.

Of course, when there are benefits there are also disadvantages as well. In this case, it is the potential ill-will if you were to ever default on the loan or make late payments. So I will offer the following disclaimer: if you are late with payments or default on your loan, a family member may disown or oust you from the family, a friend may never forgive you and will no longer be your friend, and in either case you may be sued and your home may be foreclosed. In other words, I’m well aware that what I’m suggesting in this article probably goes against everything you’ve probably ever heard about borrowing/lending money to friends and family. Now you are aware of it as well.

That being said, there is one major disadvantage for the lender. Even if you do everything by the book and set up a note and everything, if the lender ever wants to sell the note it would likely have to be at a significant discount of face value (because of the low interest rate). So the lender is more or less locked into the investment until the note matures or the home is sold. All-in-all I think it is a fairly good deal for the borrower and lender as long as both parties understand the terms, conditions, and risks.

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Today marks my first trip ever to the West Coast. Although contrary to my intuition that my trip would be uninteresting to others, including regular readers of this blog (my thanks to both of you!), I’ve decided to dedicate a post to to my expedition. I must say that I have been greeted with open arms. I have met with fellow natives and residents of the great state of Florida, residents of the great states of Hawaii and Alaska, as well as those that reside in the home of Prosper Days, San Francisco California. Although I am known (although not very well) as WealthBoy, I have found myself in the habit of introducing myself with my birth-given name.

Regardless of my introductions, I believe that Prosper Days will prove to be a productive and exciting trip for me. I only wish my better half could be here as well as our beautiful young ones. Unfortunately, we decided the trip to be much too taxing on them, and they would be better off back at home with Mom. Instead, we decided to tax Dad by sending him on the redeye back from San Francisco to Philadelphia from 10PM PST to 6AM EST (5 hours in the air). Ultimately I will arrive from Philadelphia to Jacksonville at 10:20AM the following day (8.5 hours travel time).

The story isn’t much better from there. In my haste to secure my trip from Jacksonville to San Francisco, I failed to secure transportation from the Jacksonville airport back to my home upon my return home. Much to my chagrin, after I booked my flight I came to learn that my wife had previously scheduled a play date from 10:30 until 11AM. It takes about a half-hour to get from our home to the airport, so that means it is likely I will be home no earlier than noon.

Being the analyst that I am, I surmised that WealthBoy(.com) does not yet provide sufficient income to merit a cab ride back home, so I am more than glad to await for the family to complete the play date to go pick up Dad. Later that day we will make the two-and-a-half hour drive to Orlando for our soon-to-be two-year-old. To be honest, it’s not really a big deal but I’m doing my best to make this story as interesting as possible. I would do anything for my family, especially if it involves having a good time with Mickey Mouse.

All of this in the name of peer-to-peer lending. RateLadder asked if I would be blogging about the trip. I told him that I was having a very hard time with the blogging. Despite his encouragement it is hard for me to come up with original material. I told him that my best (well…. most popular) article (Gas in the U.S. is Cheap) actually began as a repost/commentary on an article about the U.S. Auto Market being in recession. So how the hell did I come to conclude that Gas in the U.S. is Cheap?

That’s a good question that at this point I would have a hard time answering. Perhaps it may be obvious to you, or perhaps some other day when I am not wrought by jet lag and oversized west-coast margaritas I might be able to answer that question. Actually I only had one oversized west-coast margarita, one shot of excellent tequila, and many beers, but again… That’s another story.

I’m still finding my place as a blogger as well as becoming a dispenser of good information. I’ve found that the most interesting bloggers have a propensity perform both acts exceedingly well. We shall see how I ultimately perform in my endeavor. I suppose I summed it up well when I told RateLadder, “I guess most bloggers become truly successful (bloggers) when they are able to integrate their blog well with their life.” Up until now I have not done that, but perhaps beginning with this post I will make a greater effort to do so.

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My first post on the official Prosper Blog was published today! Many thanks to Rate Ladder, Editor-in-Chief of the Prosper Blog, for affording me the opportunity to contribute to the Prosper community. I hope it is the first of many articles to come.

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The WealthBoy Strict ROI for Prosper Lenders

Recently, I had come across an article about zopa.com and it really peaked my interest on peer-to-peer lending. In researching more about Zopa, I also came across two other major peer-to-peer lenders: Prosper and LendingClub. I researched both Prosper and LendingClub a bit and decided I liked LendingClub better, so I signed up for an account with them.

I had problems validating my identity with LendingClub, which was extremely inconvenient. It prevented me from investing in any loans, which defeated the purpose of signing up. I then began researching Prosper a bit more and signed up for an account with them as well. I had absolutely no problems signing up with Prosper and validating my identity. Within a few days of signing up, my account was funded and I was ready to begin bidding on loans.

As I was doing my research on both sites, I came to realize that although LendingClub touts very good loan statistics with regards to defaults and late payments, Prosper has been around much longer. I think LendingClub’s loan statistics are somewhat misleading, as they really haven’t been around long enough for a lot of loans to default. I read a post on TechCrunch about LendingClub going nationwide and provided some of my analysis in a comment on the article:

I would take LendingClub’s stats with a grain of salt. The oldest loans were originated at the end of May, so there hasn’t been a lot of time for defaults to take place. Also, given the rising popularity of the service, the majority of those loans will have been in force much less than 7 months. I pulled the csv down from Lendingclub, and the average loan age is only 75.85 days (only 2 1/2 months).To provide a more fair comparison, I looked at some of the Prosper.com data on lendingstats.com. 2,869 grade AA-C loans were originated on Prosper.com between July 14 – December 13. I chose grades AA-C because Lendingclub only allows those with a 640 credit rating or higher to participate. Using Prosper.com’s AA-C grades approximates this restriction. The average age of these loans is 75.7 days. I selected the dates to provide approximately the same age as the lendingclub.com loans.

Of the 2,869 Prosper.com loans, 0.87% were late, 0.82% were 1 month late, and 0.09% were 2 months late (total of 1.78% late). None of them were any later than 2 months and none of them have defaulted. Even if I went back to May 24 on Prosper.com, only 3.61% of the loans are late and still no defaults. During this time frame, 3,796 loans were originated with an average age of 100.9 days.

I think after the loans on lendingclub.com have aged more, the statistics will likely be very similar to those of Prosper A-CC grade loans. I was all ready to open up a lendingclub.com account, but then came to the realization that the service hasn’t existed long enough to provide an accurate statistics. Also, in the process of creating my account they were unable to verify my identity. They were never able to resolve the issue and I would have had to manually verify my identity. With all the problems I had in in opening the account, I decided to take a look at Prosper and decided it was better to go with them anyway since they were more established and could provide better statistics.

Basically, I found that loans on Prosper that were similar to those on LendingClub showed a late rate of about 1.78%. Currently, LendingClub shows a late rate of 0.44%. According to my analysis, the late rate on LendingClub is only about 1.34% better than that of Prosper.

I can certainly appreciate the additional measures that LendingClub takes to help investors reduce the risk of losing money from late payments and defaults (640+ FICO score and ACH repayment of loans). Afterall, that was what drew me to sign up with them first (I may have stuck with them if I hadn’t had problems with validating my identity). However, I would prefer until they have been around long enough for some of the loans to default in order to get a better overall picture. For now I will stick to investing on Prosper.

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