Feb
11
There are two kinds of personal loans - the loans you receive from banks and the loans you receive from individuals. For most people, personal loans from individuals take the form of family loans, but they can also be fraught with tension. Now, you can also give or receive personal loans to people you don’t know. Prosper and the Lending Club are two of the top sources for personal loans. Virgin Money is the leader in the field of family loans.
Prosper Personal Loans
Prosper is a loan servicer that facilitates personal and small business loans between strangers. Borrowers receive a lower interest rate than you would from a bank or credit card company. You can borrow up to $25,000 for debt consolidation, a car, a business, or almost any other purpose. You create a loan proposal and then individuals bid to fund it. You make the payments to Prosper, which then distributes the proceeds. According to Prosper, they have an average annual rate of return of 6.18% to 8.52% and a default rate of 1.44%. They have been in operation since February 2006 and have issued 5,427 loans.
Borrowers undergo thorough credit checks and must adhere to lending standards. Prosper then rates the loans from AA to HR. The lower the rating, the higher the interest rate and rate of return.
For investors, the upside is the chance to help someone while also receiving a high return on their money. You can spread your risk by loaning small amounts to a variety of people rather than a large amount to one person. The downside is that there is no guarantee the loan will be repaid. The same could be said of a stock market investment, though.
For borrowers, the upside is the lower interest rate you pay. You also receive the loan anonymously, so your friends and relatives don’t have to know about your debt. The downside is that you only have up to three years to pay it back. With credit cards, you could probably spend forever paying it off and your creditor would be happy to let you do just that.
Lending Club Personal Loans
The Lending Club is very similar to Prosper. The risks are the same. They claim an average rate of return of 12.38%. Their default rate is 0.0%. However, they have only been making loans since May 2007 and have only issued 928 loans.
Lending Club requires borrowers to have a minimum credit score of 640. Based on the borrower’s credit history, the loan is rated A through G, with A loans receiving lower interest rates and having less risk.
The upsides and downsides are the same as they are for Prosper.
Virgin Money Family Loans
Virgin Money is owned by Virgin, but was formally an independent company known as CircleLending. Rather than manage loans between strangers, they facilitate loans between friends and family members. In addition to personal loans, they also manage mortgage loans and student loans. These are true family loans, which means everyone knows everyone.
The old adage says that you shouldn’t lend money to friends and family members, yet thousands of people do every year. Parents loan to children, uncles loan to nieces and nephews, friends loan to friends. Many of those loans lead to strife because the lender sees the borrower spending money and wonders why their loan wasn’t repaid instead.
Virgin Money’s goal is to take the stress out of family loans. You choose the interest rate and the payment schedule, and they complete the paperwork and tax documents. They can also service the loan for an additional fee. They do recommend adhering to the Applicable Federal Rate (currently 3.18%) for loans over $10,000 in order to avoid having the funds classified as a gift by the IRS, but you can choose a rate of 0%.
The downside is that you’re introducing a third party into a family or friendship. For business investments between friends and family members, this is probably a great idea because it confirms the business relationship. I don’t know if my parents would have wanted to use a service like this to loan me college funds (which they later forgave.) They’ve also said they’ll help my husband and me with our down payment, but we don’t want to have strict repayment terms governing those funds. We expect to pay it back, but we don’t know when and we don’t know how quickly.
The other downside is the loan fee. Virgin Money charges fees ranging from $99 to $2499 depending on the type of loan and level of servicing. Depending on the size of the loan, that could be a substantial cost.
Personally, I might consider Prosper or Lending Club for investment purposes, but my relationship with my parents is good enough that I wouldn’t want to involve Virgin Money in the family loan process.
Jan
23
The LIBOR and Fed Rate Fall: What that Means for You
Filed Under Financial News, Investing | 2 Comments
Yesterday, as you probably heard, the Federal Reserve Bank cut the key overnight interest rate by 75 basis points. The LIBOR (London Interbank Offered Rate) has also been dropping due to credit concerns. So, you may be wondering what this means for you. The answer is that it depends on how your finances are arranged.
Credit cards: You may see your credit card interest rate fall slightly, but probably not by much. This is one place where lenders can actually make money.
Mortgages: If your prime-rate, adjustable-rate-mortgage is pegged to a Treasury rate, the Fed rate cut could reduce your mortgage rate. Unfortunately, many loans are pegged to the LIBOR instead. This is especially true of subprime and ALT-A loans. Although the falling LIBOR may help some of them whose interest rates are resetting, the decline is too incremental to make a big difference in their ability to pay.
If you’re in the market for a new fixed-rate mortgage or a fixed-rate refinance, this cut is excellent news for you. Contact several lenders to find out their current rates and offers. They may ask you to jump through a few additional hoops, but it’s worth it if the home you want to buy is reasonably priced and you can lock-in a low rate. Nickel discussed the low mortgage rate he received just today.
Student Loans: If you have a variable student loan, you may or may not see a reduction in your interest rate. Like many mortgages, student loan rates are often now linked to the LIBOR.
Auto Loans: If you’re in the market for a new car, check out the different rates available. Although offers from dealers may not change much, your local bank or credit union may be offering a reduced rate.
Employment: The Fed rate cut was partially intended to encourage corporate borrowing. Lower rates make it easier for banks to find money to lend, and corporations are the largest borrowers. That said, a rate cut probably won’t affect your employment directly. Many experts aren’t predicting large lay-offs even if a recession does occur. Your employer may reduce spending on optional projects, but your job is probably safe unless you’re in the banking/housing industry.
Savings: The Fed rate cut does mean the interest rate on savings accounts, CDs, and other accounts will fall. If you have a CD that is about to expire, research your options carefully before rolling it over into a new one. You may find better vehicles for your savings right now.
Investments: If you’ve checked your portfolio recently, you know it’s hurting. The rate cut was intended to stimulate the market, but the experts I heard on NPR weren’t sure how effective it would be. They did say that it may have been enough to avoid a panic sell-off, but it probably won’t send anyone’s stock soaring. Monitor your investments, but don’t make any sudden moves if you’re investing for the long haul.
The Fed may cut the rate again in two weeks, but for now, continue your frugal habits and don’t stress about the fluctuations of the Fed.
