From Student Loans to 401Ks: Money Advice for Millennials

A recent survey found that more than half of people aged to 18 to 29 have delayed major life events like marriage, buying a home or saving for retirement because of student debt. Well take up financial advice for todays young adults, how to avoid fiscal missteps and rebound from ones you may have already made. Whats your money question?

Host: Michael Krasny

Obama to announce changes for college student loans during Iowa visit

President Barack Obama will focus on college students loads on Monday during a visit to Iowa.

He will announce changes to the federal college aid system.

House OKs measure to waive some fees for veterans’ business loans

WASHINGTON Senate and House Small Business Committee leaders applauded House passage Monday of the Veterans Entrepreneurship Act of 2015 (HR 2499).

The bill would lower the cost of Small Business Administration (SBA) loan programs designed to assist veterans in starting and growing their small businesses. Last week, Sen. Jeanne Shaheen (D-NH) and Sen. David Vitter (R-La.) amended the legislation to also increase the lending authority for the SBAs 7(a) program, which reached its annual limit of $18.75 billion.

HR 2499 raises the 7(a) programs lending authority from $18.75 billion to $23.5 billion through the end of the fiscal year and requires the SBA to communicate more consistently and quickly with Congress before the limit is reached again, all at no additional cost to taxpayers.

The legislation now heads to the Presidents desk for signature.

Senate Small Business and Entrepreneurship Committee ranking member Shaheen: Many New Hampshire veterans are applying the same can-do approach they used in the military to start and grow their own small businesses, and our legislation will help them by waiving some of the fees associated with federal small business loans. Im also very pleased that this legislation will allow the SBAs popular 7(a) loan to start lending again. This program is a model of public-private partnership and should be allowed to grow with demand to meet the needs of small business and entrepreneurs. As this legislation heads to the Presidents desk, I want to thank my colleagues in the House, Chairman Steve Chabot and ranking member Nydia Velaacute;zquez, for their diligent bipartisan work to advance the Veterans Entrepreneurship Act and get the SBAs most in-demand loan program up and running again.

Will LendingClub Become THE Online Lending Platform For Consumer Credit?

Despite the recent market sell-off, FANG (Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Google (NASDAQ:GOOG) (NASDAQ:GOOGL)) is still positive YTD. FB is up 16%, AMZN 67%, NFLX 103% and GOOG at 16%. They are currently evaluated using DCF models, which do not take into account the ability of technology companies to enjoy explosive growth through the introduction of new products.

These companies are platforms, and when they introduce a new product, it is immediately adopted by most users who are already embedded into their ecosystem. This allows FB to push video ads, AMZN to easily grow and bundle more services into AWS, NFLX to add original programming and GOOG to introduce deep linking to Android. FANG should not be evaluated based off their current products but their value as platforms that can easily create new products.

Platforms are the inevitable end product of the scalability of technology and a winner takes all market. The company which solves user problems the fastest, attracts users, which attracts more users and results in a platform. The platform then has a captive audience, which can be channeled into new products. So when evaluating a tech company, instead of doing a DCF model, investors should be asking Is this company going to become a platform that will take over the entire marketplace?

To reach an answer to the question, we have to first answer three questions:

  1. How large is the total addressable market?
  2. How does the product help buyers?
  3. How does the product help sellers?

If the company makes its own product and is the seller, it needs to allow people to build on top of their product so that it can be customized to fit any purpose without the use of additional resources from the manufacturer.

Now lets attempt to examine if LendingClub (NYSE:LC) is a company that can take over the entire marketplace. From a fundamental perspective, its a great product because it merely connects borrowers with investors; it bears no credit risk. From the 10-K:

We sell securities or whole loans to investors and the securities are matched in terms of rate and duration with the underlying loans. LendingClub does not assume credit risk or interest rate risk which are borne by investors. Therefore, there is no capital requirement or DSE insurance.

How large is LCs total addressable market TAM?

LendingClubs TAM is the $3.42 Trillion of outstanding consumer debt.

Until 2014, LendingClub only handled P2P loans up to $35,000 for the purpose of consolidating debt, paying off credit cards and home improvement. In 2014, it acquired Springstone Financial LLC for $140 million and entered the market for financing private education and elective medical procedures. In the same year, it started offering small business loans up to $300,000 for expanding businesses, buying inventory, working capital, purchasing equipment and refinancing debt. In a 2015 interview with Forbes, LendingClubs CEO mentioned that there are plans to expand into car loans and mortgages, exposing LC to the entire consumer credit market in the US.

How does LendingClub help borrowers?

LendingClub can attract borrowers by providing:

  1. Easy access to credit
  2. Cheaper access to credit

Accessing Credit

Traditional access to credit through a bank loan:

  1. Go to your local bank and meet with a person who tells you what documents are necessary
  2. Collect the documents and make time to travel to the bank again with the documents
  3. The banker inputs all the information into the banks system and provides a quote.
  4. If you find the terms of the loan acceptable, you sign documents and receive the money 2-4 weeks later.

Traditional access to credit through a credit card:

  1. Locate all of the statements you receive from the credit card company.
  2. Locate the maximum borrowable amount on the statement and dig through the fine print for interest rates.
  3. Plan how you will split the amount across multiple credit cards.
  4. Withdraw the money and then juggle different repayment schedules.

Accessing credit through LendingClub:

  1. Fill out an online form in 3 minutes to receive a quote.
  2. Upload documents in 30 minutes to verify the information provided earlier.
  3. Wait 3-5 days for loan approval.
  4. Wait 2-3 days for the money to be deposited in your account.

Of the 3 options, LendingClub is easily the most convenient choice.

Price of credit

As of 6/30/15, 70.45% of LendingClub borrowers report using their loans to refinance existing loans or pay off their credit cards. Based off this information, we can easily infer that customers have already attempted borrowing from traditional lenders and are not attracted to LendingClub for its convenience, but for its cost of credit. If LendingClub were not a cheaper alternative, borrowers would never refinance debt at a higher rate.

So how is LendingClub providing cheaper access to credit? Are they merely mispricing it because they are a startup with no experience at credit analysis? The most apparent answer to the question is that LendingClub has fewer costs than the traditional bank or credit card company.

The established players have to manage a large retail footprint, creating rent and employee costs which creates more opportunities for cross selling but also is a consistent cost base which cannot be scaled easily. The incumbents are also running their operations on outdated technology infrastructure, which they dont attempt to improve unless it breaks.

In contrast, LendingClub has no physical locations, has a technology platform, which can easily accommodate more users with the addition of some client support staff. LC also does not have to deal with sending statements or processing transactions made at the borrowers direction; all communications occur over email and LC is automatically paid out of the clients bank account.

Despite the lack of much human contact in the LendingClub process, the company is still able to build relationships with borrowers with roughly 27% of borrowers coming back to LendingClub and obtaining a second loan within four years of obtaining their first loan.

For a borrower, there are few reasons to not be on LendingClub. It provides convenient and cheap access to credit, especially for borrowers with high credit ratings who can borrow for as low as 5% on LC.

How does LendingClub help investors?

Investors in P2P loans are only concerned about the returns they receive on their investment. Despite the interest LC has received from institutional investors, retail investors accounted for 70% of loans in Q2 2015. Institutional investors only accounted for 9% of loans last quarter. Retail investors are attracted to LendingClub because it offers 11% interest annually compared to the 1% they currently receive on CDs. There are more than 100,000 active retail accounts with an average account size of well over $15,000.

Investors will continue to fund loans on the platform as long as they are sufficiently rewarded for their risk. It is difficult to determine what an acceptable rate of return would be for investors in the nascent P2P market but we can absolutely determine that investors are receiving less than double-digit returns on their LC investments. For data on actual investor returns, LendingClub is very helpful with this nifty chart:

(click to enlarge)

As you can see, the median return on a 2-year LendingClub portfolio is 7.3%, which is close to the 8% rate advertised in this video. The returns start as high as 13% when the portfolio is 3-6 months old. Then, the defaults start kicking in and drag down the overall ROI for the portfolio.

The default rates are absurdly high at 6.5% annualized per portfolio which suggests the low cost of credit is being provided by the retail investor who is uneducated about default risk and its implications on his/her portfolio.

NSR Invest has collected data on over $9 billion of LendingClub loans out of the $11 billion issued to date.

(click to enlarge)

The data they have collected points to an alarming trend. Even though consumer balance sheets started improving in 2010, LC default rates climbed from 5.85% in 2010 to 7.46% in 2012. While recorded default rates are lower in 2013 and 2014, it takes 9 months for 89% of a loan in default to be written off so investors can expect the default rate to rise substantially before all the loans come due. APR paid on loans has also declined from 14.8% in 2013 to 13.1% in 2015 even though the creditworthiness of borrowers has remained constant.

The returns on P2P loans are dependent on the credit cycle. Returns will be higher in good times when people are employed and can easily pay off debt or refinance it. Returns will be poor when borrowers lose their jobs and lose access to credit. LendingClub technically has performance data on a period where credit dries up as it issued loans back in 2008 and 2009. However, the data is not very helpful because it only covers loans totaling $70 million, which were probably all issued to early adopters in Silicon Valley, a population not representative of the entire US.

Overall, LendingClub is marginally better for loan investors, but is not the best choice for investors looking to invest in consumer credit. The APR and default rates will change as LC adds new type of loans, but LendingClubs default rate remains too high. If they can bring down defaults from 6.5% to 5% and provide 7.5% return on a pool of 12.5% loans, it will have addressed investor demands for high returns. As of now, LendingClub provides enough returns to keep investors interested – not enough to lock them into the platform forever.

Will LendingClub become THE online lending platform for consumer credit?

It is possible but I cannot crown them the winner yet. LendingClub is tackling a massive market with a large opportunity for disruption and it provides easy and cheap access to credit for borrowers. However, it does not offer returns high enough to keep investors from looking elsewhere. Until LendingClub resolves this problem, any of the other startups in the lending space could leapfrog them by evaluating credit from a different perspective, which leads to lower defaults and higher returns.

I recommend Holding LC due to its growth potential but would not consider buying the stock unless it lowered the default rates on loans.

3 Bad Money Habits You Should Finally Kick

1. Spending More Than You Want to Earn Rewards Points

Provided they’re used responsibly, rewards credit cards can be an awesome thing. However, if you find yourself using a credit card just so you can rack up more points, you might be in for a world of trouble. This can be incredibly problematic if you’re trying to follow a strict budget or struggle to keep yourself from splurging on frivolous purchases.

One way you can break this bad habit is to only use your rewards card for regular, monthly expenses. For example: let’s say you decide to leave your card at home and only use it to make automatic payments on your phone bill, gym membership dues, and car insurance payment – which you then pay back in full every month. This could help keep you from making erratic purchases, while also still providing you with a steady stream of rewards points.

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2. Ignoring Your Bills

Coming home to a big pile of bills is a drag, there’s no doubt about it. But tossing them onto the coffee table and ignoring them for weeks on end can have terrible consequences for your financial well-being. Consistently ignoring your bills is a sure way to find yourself missing your payment due dates, which could have a really negative impact on your credit scores. If you want to see how your debt is affecting your scores, there are many ways to get your credit scores for free, including through Credit.com.

A simple way to combat bill procrastination is to start being proactive. Whenever you find yourself faced with a bill, tackle it immediately and without hesitation. While it might be a bit of a struggle at first, over time you can reap the rewards of having less finance-related stress. Of course, if you still find yourself having trouble making your payments on time, there’s always automatic bill payment.

3. Cycling Your Debt Without Fixing the Real Problem

If you find yourself constantly consolidating debt or transferring balances to new credit cards, you might have developed a habit for debt swapping. While having a lower interest rate and one monthly payment can definitely help solve short-term problems for you, if you do it all the time you could be avoiding the underlying issue. In fact, it might even be keeping you from coming to terms with the behaviors that are forcing you into an almost perpetual state of debt.

If you think you’ve developed a habit for debt swapping, chances are it’s because you’re having a difficult time living within your means and maintaining a positive debt-to-income ratio. Building a budget could reveal to you how much you’re overspending each month and help you uncover ways to cut back and save. In time, you should be able to erase the debt you’ve accumulated and find yourself on much more stable ground. (This free calculator can help you figure out how long it will take to pay off your credit cards.)

For most of us, changing our behavior isn’t as simple as flipping switch, so it may take a lot of time and effort. Starting is the hardest part but, I can assure you, it gets easier with time.

More on Managing Debt:

  • How to Pay Off Credit Card Debt
  • The Best Way to Loan Money to Friends amp; Family
  • Top 10 Debt Collection Rights

Image: iStock

A crisis in student loans? How changes in the characteristics of borrowers and …

Abstract

This paper examines the rise in student loan delinquency and default drawing on a unique set of administrative data on federal student borrowing, matched to earnings records from de- identified tax records. Most of the increase in default is associated with the rise in the number of borrowers at for-profit schools and, to a lesser extent, 2-year institutions and certain other non-selective institutions, whose students historically composed only a small share of borrowers. These non-traditional borrowers were drawn from lower income families, attended institutions with relatively weak educational outcomes, and experienced poor labor market outcomes after leaving school. In contrast, default rates among borrowers attending most 4-year public and non-profit private institutions and graduate borrowers–borrowers who represent the vast majority of the federal loan portfolio–have remained low, despite the severe recession and their relatively high loan balances. Their higher earnings, low rates of unemployment, and greater family resources appear to have enabled them to avoid adverse loan outcomes even during times of hardship. Decomposition analysis indicates that changes in characteristics of borrowers and in the institutions they attended are associated with much of the doubling in default rates between 2000 and 2011. Changes in the type of schools attended, debt burdens, and labor market outcomes of non-traditional borrowers at for-profit and 2-year colleges explain the largest share.

Stateside car loans hit $1 Trillion record

A report from Auto Beat makes eyewatering reading: US consumers have gone on a car spending spree using finance to fuel the purchase. Figures from the Federal Reserve Bank of New York says car finance has hit a record high of $1.01 trillion. The low cost of fuel has made US car buyers turn their

Ellis Equity Astonishes with Lucrative Interest Rates on Lending in Houston

Houston, Texas – September 2, 2015 – As a Hard Money Lender that was formerly known as Ellis Management Company, Ellis Equity has been in the lending business for well over forty years. The hard money lender at the head of commercial finance provides raw land, equity loans on farms and ranches along with acquisition loans and more.

Extending short term advances for 6 to 24 months, the enterprise delights people who require funds for a short duration of time. The alternative lending offered with hard money, bridge and raw land loans convenience customers. People can then free up equity in properties by paying off demanding banks, or consolidating debt. The noteworthy hard money lenders are known for fast close and quick decision having been in the lending business since 1972.

At the forefront of lending companies, Ellis Equity looks forward to funding your advance and typically closes and fund a transaction within 15 days based upon availability of title and required documents. Depending upon the project dynamics, sponsor suitability and deal structure, our rates range from 11 to 14 percent on an interest only basis. You can avail our loans from $100,000 to several million dollars as per your needs, says a company spokesperson.

Excelling in offering commercial credit secured by real estate, the business is owned by experts who top in assessing and determining collateral and determining investment values. Armed with an excellent network of leads and information, the enterprise extends advances to a number of clients. The business also offers underwriting with transactions based on a personal valuation of all underlying collateral.

When it comes to eligible properties, the company considers first liens on raw land, commercial properties along with warehouses and Municipal Utility Bond receivables. The in-house team of skilled personnel perform exceptional diligence with closing and servicing duties relating to the funding of credit.

With credit amounts ranging from $100,000 to $8,000,000, the lenders go so far as offering clients extensions in special circumstances for convenience.

Video Link: http://www.youtube.com/embed/fkka-FtvnVU

About Ellis Equity

Ellis Equity extends funds for a period of 12 to 24 months and longer to clients for collateral with alluring interest rates.

To know more, visit http://www.ellisequity.com/

Distributed by Ellis Equity

Media Contact
Company Name: Ellis Equity
Contact Person: Billie Ellis
Email: sales@ellisequity.com
Phone: 713-952-8022
Address:2825 Wilcrest Dr #300
City: Houston
State: Texas
Country: United States
Website: http://www.ellisequity.com

How I’m Paying Off $155K of Student Loans From Pharmacy School

Katharine Hebenstreit, COO of LinkCapital, which specializes in helping medical professionals refinance student loans, says they often see very high debt levels among graduates going into medical professions. Some will pay more than half a million dollars by the time they pay off their loans. “It’s unfortunate that burden (debt) often dictates the careers they will pursue and have a negative impact on life options such as buying homes or cars.”

Jackie, (she asked that her name not be used) who recently earned a degree to become a pharmacist, is one of those graduates with a lot of debt. With help from her parents, she was able to earn her undergraduate degree debt-free. But upon graduating from pharmacy school, she had about $155,000 in student loan debt. 

“I didn’t expect it to be that much,” she says.  “Each year the tuition was more and more expensive.” It wasn’t until she graduated and had her exit interview with the financial aid office that she realized what she was up against.

Jackie has been frugal. She lived at home while attending pharmacy school, and that meant she didn’t have to borrow money to pay for housing and other living expenses. (She had friends in school who did). 

And after graduation she landed a job pretty quickly. Some of her fellow students haven’t been so lucky. “I’ve had a classmate who had to defer 10 months,” she says.

Jackie’s strategy is to be as aggressive as possible in her efforts to pay back her loans. “Right out of graduation I set a budget for myself,” she says. “Coming out of school and working part time, I decided to keep that lifestyle consistent.”  She’s still living at home, and in addition to her full-time job at a retail pharmacy, she picks up extra shifts at a hospital.

Some months she doubles up and pays $4,000 to $5,000 on her loans.

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She also took advantage of refinancing to help cut her costs. She was hesitant at first, she says, but shopped around and says she chose the loan with the most competitive rate, a five-year variable rate at 2.18% (which will drop to 1.93% since she chose automatic deduction) for a monthly payment of $2,725. While her payments aren’t small, she will save just over $31,000 over the life of her loan, assuming current interest rates. (If youre considering refinancing, make sure your credit is in good shape, since it will help determine your interest rate. You can get a free credit report summary every month on Credit.com to see where you stand.)

Jackie says she really feels for her classmates, some of whom have even higher debt loads than she. But she’s focused on doing everything she can to knock out her debt while she’s still young and single. Someday she expects to have a family — and a mortgage –and she doesn’t want this debt hanging over her head. “I don’t want to be 60 and still paying off my student loans,” she says.  

Not all students with student loans will enter high-paying careers when they graduate. And some leave school without a degree. But regardless of your income, if you are concerned about paying off your student loan debt, youll want to try to come up with a strategy to pay off student loan debt, including student loan forgiveness programs, flexible repayment plans like Income-based Repayment or Pay As You Earn, and student loan refinancing. Each options has pros and cons, and more often than not, there is no perfect solution. But using these programs to make sure payments are made on time can keep the loan out of default and protect your credit rating.

More on Student Loans:

  • How Student Loans Can Impact Your Credit
  • Can You Get Your Student Loans Forgiven?
  • Strategies for Paying Off Student Loan Debt

Image: iStock

RateSetter to offer secured loans for carsales.com

P2P lending is going from unsecured to secured in automotive financing, and we will extend that out to other types of security we can take, Mr Foggo said. Where we can take security, we can provide a safer investment for the investor and a lower interest rate for the borrower.

Stratton can offer car loans at a prime rate of 3.79 per cent a year for certain buyers seeking high-value cars that can be securitised-but not all cars can qualify for such an attractive rate. But banks charge interest rates of between 12 per cent and 20 per cent on personal, unsecured loans, which are often used to buy cars. RateSetter says this dynamic has created a gap in the market.

While its secured loan interest rates will be determined by the credit quality of the borrower, the amount of the loan and the value of the car compared with the loan, RateSetter said a typical borrower could save up to $1000 on a three-year, $15,000 secured car loan compared with the unsecured equivalent.

Opportunities for development

We are working with Carsales to broaden ourfinancing solutions because there are parts of the automotive finance market that are under-serviced by traditional lenders, Mr Foggo said. It is very early days in terms of our partnership, but this is a key step in allowing us to develop opportunities effectively.

There are around $100 billion of non-mortgage personal loans outstanding in Australia; around half of these are secured, mostly against vehicles. Macquarie and Bank of Queensland are active in the space.

Alternative finance providers are looking to exploit other lending markets that have been overlooked by banks. In July, Stratton said it would acquire 75 per cent of finance broker All About Finance, a specialist lender for boats, caravans and motorcycles. Mr Foggo said RateSetter was interested in lending for these assets, which could also be secured to reduce rates for borrowers.

RateSetters main competitor,SocietyOne, is also expanding into niche areas, including livestock lending, where in partnership with Ray White Rural it offers financing for buying livestock by creating security over the animals via the national livestock identification system.

Just over $7.3 million of funds are currently on loan over the RateSetter platform, according to its website. Mr Foggo said it is matching around $2.5 million a month, including just over $600,000 last week. The average loan size is $16,000 and of the 500 loans made to date, there have been no defaults, while two loans are in arrears, he said.