The Broke Professional - Grow your money and yourself

I Would Love to do Peer to Peer Lending but…

check-cashing

Our state is too good for P2P lending, but not too good for establishments like this.

Update:  As of February 2016, Lending Club is now open to Maryland residents!  Click here for the details.    I will be doing some heavy research into this before I take the plunge, so look for an update on my journey into P2P lending.  Edit:  Still no Prosper though 🙁  

I’ve been hearing a lot about Peer to Peer Lending (also known as P2P lending).  It’s one of those topics I just kind of glossed over since I had more “pressing” things to learn about like student loans, investing and trying to freelance.  Before last week I had a rough idea of how it worked.  Many people were reportedly getting great returns, but it seemed like a lot more work than I would have liked.  It seemed complex and then some bloggers reported that they were still getting good returns, but not as high as before.  I didn’t think it was worth my time.

But last week I heard an interview on the Stacking Benjamins podcast (which is a great podcast by the way).  The interview was with Simon Cunningham, who runs a website called Lendingmemo.  His interview pretty put P2P lending in a much clearer light for me and I was itching to learn more.  I went over to LendingMemo and got some great information.  Here are what I believe to be the pros of P2P lending:

  • You’re loaning capital to actual people, and not a big corporation.  The vast majority of borrowers on P2P sites are looking for help paying off credit card debt.  I could definitely get behind that.
  • It’s relatively low risk.  The two big P2P sites are Lending Club and Prosper, and they each have their own algorithms they use to determine the risk that a borrower will default on their loan.  According to LendingMemo, the default rate for Lending Club is around 5%, which was a lot lower than I expected.  Higher risk borrowers give investors the potential for higher returns, while low risk borrowers give less a return but a good chance that you will get a return at all.  It’s like a balancing act between risk and reward, which is what investing generally is.
  • Returns are solid.  According to Lending Club, historical returns of their lowest risk loans range from 4.91%-8.38%.  That’s a very good return for what seems like a low risk investment.  And it certainly beats the pants off of an online savings account or CD.  While past returns don’t reflect future performance, it’s good to keep them in mind.
  • It seems like fun.  My preferred method of long term investing, making regular contributions to index funds, is pretty boring.  The only thing I may have to do is rebalance, which takes just a few minutes.  Otherwise, it’s set it and forget it.  With P2P lending there are a few more decisions you have to make, and while they do have an automatic contribution system to make things super easy, you still have to check on your loans from time to time.  This seems like it would be be a fun mental exercise.

I say it SEEMS like fun, because I will not be able to see if it is really fun.  Here’s the notice I received when I tried to sign up for an account at Lending Club:

lending club deniedYes, because I live in the state of Maryland, I can’t participate in direct P2P lending as a borrower or as an investor.  As a medical professional, I’m used to the zany differences from one state to another, but this was just a little annoying.  Some states allow you to use Lending Club only.  Some states allow Prosper only.  There are only 3 states that don’t allow any type of P2P activity (Kansas, Ohio and Maryland), and I happen to live in one of them.  This would firmly fall into the category of a first world problem, but it’s still a problem.  (Here is an interactive map that diagrams all the craziness between states).

So what is an aspiring P2P’er from Maryland to do?  My plan is to do some more research on P2P lending until I know it front to back.  In the meantime I’m still working on getting rid of a 6% student loan, so paying that off would be a pretty good use of my money.  And then I’ll just wait until the curmudgeons in charge of Maryland join the P2P bandwagon.

Share

Don’t Be Your Own Worst Enemy

Stop getting in your own way!

Stop getting in your own way!

Investing can be a tricky business.  You have to determine why you’re investing and what you’ll be investing in.  Then you have to make investing a habit and do it regularly.  But you also have to watch yourself and make sure you don’t abandon your well thought out plan and change your investments around once the going gets rough.

It has been normal as of late to experience a 2% gain one day followed by a 2.5% loss the next day, and vice versa. Listening to most financial news outlets, you would believe that these are the darkest days the market has seen in a long time.

While it is true that the S&P has seen some dramatic ups and downs as of late, it has not reached the “correction” stage as many financial television stars have been breathlessly predicting the past few months.  Even after the infamous Brexit vote, the stock market actually GAINED ground for the week after a big single day loss after the vote.

For those heavily invested in the stock market, watching these wild swings can be dizzying. But the market goes up, and the markets go down. That’s what it has always done and that’s what it will always do. The important thing for investors to remember is to stay with the plan through thick and thin.

Stick to the Plan

If you and your financial advisor have already formulated a long term investing plan, you can be sure that volatility, or the ups and down of investing, has been taken into account. While timing the market is usually an exercise in futility, the market has historically been pretty predictable as a whole.

Taking a long term view, let’s say 30 years or more, the market has always gone up in any such period. After bear markets and periods of volatility, the market has rebounded to new heights. This was most likely taken into account when forming your financial plan, so there is no need to abandon the plan if a little volatility rears its head.

In fact, doing so would be foolish and harmful to your wealth. To make money with any investment, you need to buy low and sell high. By abandoning stocks in your 401k when there is a downturn, you are essentially buying high and selling low, exactly the opposite of what you should be doing.

Manage your Behavior

Staying the course sounds great in theory, but it can get old after a while and start to wear you down. Listening to the doom and gloom of the mainstream media and talking to people who are making big market moves can make it tempting to pull the trigger.

Pushing that panic button could torpedo your entire financial plan. Sitting on the sidelines during dramatic market swings can actually wear an investor out, and the idea of keeping your money “safe and sound” in a money market account sounds really enticing.

But, again, it’s important to remind yourself that markets go up and down. That is simply the nature of the beast. Find a way to tune out the noise to avoid any volatility fatigue. This could mean not watching any financial media for a few days, getting a pep talk from your advisor or reading a common sense investing book. You can be your own worst enemy when it comes to making investment decisions.

Conclusion

Sometimes, the best course of action in times of turmoil is to do nothing. Let others head for the hills and abandon their stocks, which will invariably happen as we see a rush of investors dumping equities and heading to bonds.

Sticking to your plan will allow you to pick up stocks at a bargain and be poised to gain tremendously when the next market upswing occurs. So while others will be scrambling to get in on the gains, you will already be locked in. Think about that when the idea of staying the course starts to wear on you.

Share

If You Don’t Want to Work Forever, You HAVE to Start Investing

Investing_money

Investing for retirement is usually not a topic of discussion among new graduates.  Most Millennials would rather talk about Pokemon Go or Game of Thrones,  Two things I have thankfully not gotten sucked into yet. A discussion about student loans … [Continue reading]

Get a 2%+ Return on Every Credit Card Purchase

credit cards

The idea of getting something for nothing has always been the holy grail. The goose that lays golden eggs.  The Fountain of Youth.  Turning lead into gold.  All these stuffs of legend involve getting something amazing without having to expend any … [Continue reading]

Where to Refinance Your Student Loans

SoFi page 1

Sometimes, people just need their hand held when trying something new.  I've found this to be the case when recommending student loan refinance to colleagues. I recently wrote why everyone with student loans should consider refinancing.  The best … [Continue reading]

4 Books New Grads Should Have Read BEFORE Finishing School

Students in undergraduate and professional school usually have one thing on their minds: sleep!  The next thing is usually studying to do your best (or to just stay afloat) in your respective program.  Many times this requires a laser like focus … [Continue reading]

Everyone Should Consider Student Loan Refinancing

Unshackle your life

Few opportunities in life will allow you to keep more of your own money year after year with very little work on your part. You can call your cable company to negotiate a better price.  That can save you $50 bucks or so per month.  But you have to … [Continue reading]

Educating from the Exam Room to the Blogosphere

profile

Blogging is not as easy as most people make it out to be. It takes consistent time and effort to produce a quality blog, let alone one that makes some money. But the most important thing needed to become a successful blogger is passion for your … [Continue reading]

How to Get an Amazing Return on your Savings Account

Savings accounts will save your life.

The financial services industry is enormous.  There are countless magazines, commercials, shows and blogs that talk about financial products and services (I do that also, but only with products I use and trust.  Like Digit.) Companies like … [Continue reading]

Wealth Savings Account

HSA post.  Another one.

Another Health Savings Account post?  Yes.  Another one. I've written about HSA's previously here and here.  But it seems some people still don't get it.Since HSA's are a fairly new concept, I thought I would give one more post at explaining … [Continue reading]