“Loans” Archive
May
1
Over the past few weeks, a scandal involving the student loan industry has been unraveling before our very eyes. The gist of the story is that some of the largest student loan firms, such as Sallie Mae, Citibank and Student Loan Xpress paid financial-aid staff at universities in order gain “preferred lender” status and have students directed their way in lieu of other lenders.
I recall very vividly that the financial aid officer for my graduate program steered me right to Sallie Mae, as they were the “preferred lender” for the program. Frankly, I made the mistake of trusting this person at their word and didn’t shop around. I’m not sure whether I did or didn’t get the best deal, but this recent scandal certainly makes me wonder. Clearly something improper happened as several lenders and educational institutions have been settling with New York State as a result of this investigation. For example:
- Sallie Mae has agreed to a settlement that sets aside $2M for educating students about loan options
- Citibank has agreed to a settlement that sets aside $2M toward a fund educating student and families about student loan options
- Both UPenn and NYU have agreed to reimburse students a total of more than $3M with money they received from lenders
So, all this makes me wonder if I ended up paying more for my student loans than I should have. In case there was any doubt as to how widespread and blatant this “preferential” treatment was, a story on MSNBC today, eliminated all doubts. I’m sure my graduate program has the same or similar criterion for picking lenders, particularly as my school was a publicly funded institution. When budgets are tight, and big money is being thrown around to schools who simply direct students to a “preferred” lender, it is no wonder that the ethical lines start to blur.
The moral of the story here is quite simple. ALWAYS shop around for the best rates, even on student loans!
Apr
10
While reading one of the blogs that inspired me to document my journey to becoming debt free, Blogging Away Debt, I learned about Propser.com, the self-described ‘online marketplace for people-to-people lending’. The value proposition, from a borrowers perspective (at least I think this is the value prop), is that you can borrow money from other individuals at rates lower than what banks might otherwise offer you, given one’s respective credit scores. To me, the concept is intriguing enough to try it and once I get the errors currently on my credit report fixed, I do plan on making use of the service.
That said, I got to thinking what the flipside of the equation might look like. Could making loans at Prosper.com be a good way to diversify one’s investment portfolio while earning a decent return? As I discovered in an article in this month’s SmartMoney, the answer seems to be a mixed bag. One of the lenders profiled in the article seems to be an extreme example of someone using Prosper as in investment vehicle:
GREG BEQUETTE, a slow-speaking man with a sly sense of humor, is an accounting specialist with the University of California, a volunteer firefighter, an amateur genealogist and not-so-born-to-be-wild biker. As if that’s not enough, he recently added a fifth avocation to his repertoire: banker. Since last summer Bequette has loaned $750,000 of his personal cash to 157 strangers around the country, including $1,338 to a goatee-wearing salesman to buy an engagement ring, $6,211 to a California woman looking to market her new “all natural” skin and nail supplement, and $3,000 to a Kansas City couple to upgrade their tanning salon.
As the article mentions, Mr. Bequette has gone so far as to take out a second-mortgage for $250,000 in order to continue loaning funds on Propser.com. So, has he been successful? It would appear so:
At first, everyone thought he’d lost his mind: “My wife was almost angry,” he says. “But now she sees the money rolling in.” His interest rates are high — 24.5% on average — and he’s earning a 15% return after accounting for bad loans. If all goes well, Bequette, 55, hopes to retire on his pension and Prosper earnings — he imagines himself lounging on a cruise ship deck with his laptop, managing his online loan portfolio.
Although Mr. Bequette’s results have outpaced one of my most trusted long-term investments, Vanguard’s S&P 500 Index Fund, it appears that overall, lenders on Prosper don’t all have great success. In fact, the default rates for loans made on Prosper, appear to be higher than those seen by banks:
Losses on loans to borrowers with average credit, for instance, were averaging 3.1% — 50% higher than the 2.1% enjoyed by banks. And despite Prosper’s use of collection agencies to track down deadbeats, folks lending to the riskiest borrowers were typically losing a projected 18% of their money.
It would appear that using Prosper as an investment vehicle is a risky proposition at best if you are seeking anything more than an ‘average’ return. For now, I’ll stick to borrowing on Propser.
