There Are Some Things You Do Not Expect To See On A College Campus

Today’s thing would be an AARP booth.  I mean, I guess eventually I will be retiring, but not while I am in college or soon afterwards…

Stop Me If You Have Already Heard This One

Eleven days ago I bought a note backed by a loan given to someone with less than stellar credit.  It pays a lot of interest.  Sounds a lot like a structured investment vehicle backed by a subprime loan, does it not?  Well, I promise I will not go down in financial flames, and here is why:

1. Most importantly, I am only using money I can afford to lose.  I consider this no different than gambling, just with fewer dice and cards involved.

2. I am not borrowing huge sums of money in order to buy even more of these notes.

3. I did research.  I checked out the credit status of the person receiving the loan.  I know their debt-to-income ratio.  I know their general credit score.  I know how much revolving debt they have and what percentage of their total credit they have actually drawn on.  In other words, I know this is a risky investment, not something I think is a sure bet that pays a lot of interest.  This is a higher-risk venture with a high-return potential.

Okay, so what kind of return am I looking at?  Well, the $50 I loaned will be repaid over three years at an interest rate of 18.65%.   Since the payments are amortized (which basically means I get the interest on the remaining money loaned and some of the money I actually loaned back every month,) I will get about $1.80 a month for the next three years, assuming this person makes every payment on time.  That means I’ll end up with about $65 at the end of three years, or just under 10% APR.

It pays better than a three-year CD, but that is because there is a real risk the person may not pay the loan back on time or at all.  Right now, the quality of borrower I loaned the money to has a higher than 91% current rate.  So, more than 91% of the loans made to people like the borrower I loaned to are being paid on time.  I am willing to get a much larger return in return for risking that this person will not be one of those 9%.

I am planning to continue loaning people money as I save up batches of $50, so I will keep you updated on how things go.  If you are curious what service I am using to do all of this, it is Prosper.com.  If you are interested in becoming a lender too, let me know, and I can send you an invite.  If you make a loan because of the invite, we both get $25, so it is better for you than just signing up.  (It is better for me, too.  I have no shame.)  If you are interested in borrowing money, I can send you an invite too, but I get $50 if you borrow, and you do not get anything, other than a loan.  (Again with the lack of shame.)

p.s.  When I said I am only using money I can afford to lose, I meant it.  This is all being funded from the “fun money” I get to keep from my paycheck.  I am not even using all of my fun money, since I put some aside every paycheck into a savings account to pay for things like birthday and Christmas presents for my wife.  I would not risk money for my retirement on something like this.

The Sickness

I may be a little sick.  All the financial turmoil going on is really, really exciting for me.  I wish I had a job on Wall Street right now.  The rapid change of things would keep me up and going for days.  So, yeah, I probably am a little sick.

Again, I must sing the praises of Steven Pearlstein.  His article today on cleaning up after the “category 4 financial storm” is both insightful and scary.  He comes out and says something I have been mentioning to my wife, and thought I had mentioned on my blog, but I cannot find it in the archives, so I must have forgotten.  What was it he said?  To paraphrase, that the entire economy has to de-leverage itself.

Right now all the players in the economy from conusmers to business to the federal government are living on borrowed money.  Well, everyone’s willingness (and ablility) to continue lending is drying up, quickly.  We all need to start living within our means again.  And by “living within our means,” I mean living on the money you have left after making all those debt payments.  It will be a long, slow process, and with the reduction in spending, a recession is practically inevitable.

The alternative is a finanical market flailing around trying to figure out who is strong and who is weak.  Of course, the flailing will just continue to weaken strong companies and outright kill the weak ones.

I have a feeling we will see a large batch of mergers and buy-outs as the market consolidates the weaker companies under the stronger ones and companies band together to survive.  This will be bad for consumers for awhile as the number of suppliers of services, like banking, declines, they gain power, allowing them to push consumers around more.  However, hopefully this will be like a wildfire and burn off all the dead wood, allowing fresh growth to come in and repopulate the market.

Hopefully I will be able to look back on all of this and tell my children I lived through (and prospered in) interesting times.

I Bit The Bullet Yesterday

I signed up for Facebook.  I figure it’s the college thing to do.  So, if you want to friend me, my profile can be found here.  At least starting Facebook is good for the ego.  In the first hour I had three friends.  24 hours later, and I had 11.  I’m pratically a celebrity!  😉

I’m still trying to keep myself in the blogging habit.