By on February 21, 2012

 

Back in the Clinton Era I worked as a financial analyst. My job was to make numbers dance on a computer while the masters of all things corporate made their decisions. It was brutally boring work. But when you’re only 23, you figure this rite of passage is just part of being a grunt before finally making it headlong into middle management.

I hit the middle management level a little over a year later, and then took a LOT of time off. Two hour lunches. Random walks in the middle of the day. I created Excel macros for most of my work and left the rest to other grunts in the corporate machine. I focused my spare time towards three things: cars, social life, and investing.

The first two were naturally interesting. The final one was about seizing opportunities and figuring out where, beyond Wall Street, I could develop a niche.

Since then I’ve made hundreds of loans and finance deals. Cars, new businesses, even real estate. It’s worked out well… but that’s only because I usually insist on collateral.

Lending Club has a different methodology. All of their loans are unsecured. Want to build on your home? If your credit is good enough, you can get the money… without the usual risk of a foreclosure.

Need a car loan? You may pay a few percentage points more than the 0% and 1.9% factory deals that are available for super-prime consumers. But there is no lien on your car. None.  No lien means no immediate opportunity for the lenders to retrieve the car if you default on the loan.

What are the costs should you default on your loan? Well, I would consider it the same as when you have a douchebag ex-partner. Except in this case you are that douchebag. The cost comes with a nice big thunk on your credit history and, if you operate a business, you will have higher expenses for those things that are based on your credit rating. You will also be a de facto thief, a degenerate, a lowlife, a schmuck and a parasite of the modern world.

But for some folks, that’s a small price to pay for a free car.  Come to think of it. That’s a small price to pay for some folks who still work in the corporate world.

 

 

 

 

 

 

 

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35 Comments on “Can Lending Club = Free Car?...”


  • avatar
    jmo

    without the usual risk of a foreclosure….But there is no lien on your car. None.

    But, both are subject to a lien (in most states) as the result of the judgement against you for not repaying the loan – correct?

    • 0 avatar
      Steven Lang

      No.

      Each state has limitations on what you can collect with a judgment.

      The avenue for collection on a judgment primarily exists in four categories:

      Bank account, home, wage income, vehicle.

      http://www.fair-debt-collection.com/state-garnishment-laws.html

      This is what Lending Club states in their loan agreements.

      https://www.lendingclub.com/info/loan-agreement.action

      Judgments often take years to collect and some folks go to great lengths to make themselves judgment proof. Ask me how I know.

      • 0 avatar
        jmo

        So by no, you mean yes, those things could be subject to a lien?

        So, best case, you end up with them garnishing your paycheck for years? I fail to see how that equals a free car.

      • 0 avatar
        Steven Lang

        I mean no. Judgments and liens are two very different legal instruments.

        Judgments are only good if the garnishee has wage income or assets that you can collect on. They typically take years to finalize due to the appeals process in most jurisdictions… and then you have to try to collect which is often futile.

        Liens, on the other hand, offer immediate collection and restitution. In most states you can recover the vehicle immediately regardless of their financial situation. Even if the person declares bankruptcy, they will likely not be exempt from the lien once they emerge from it.

      • 0 avatar
        jmo

        “Judgments are only good if the garnishee has wage income or assets that you can collect on.”

        Which, in my example, he does.

        I think you’re thinking of the folks you deal with who are judgement proof. That wouldn’t tend to be the case with these borrowers, if someone is doing a reasonable amount of due diligence.

  • avatar
    strafer

    I have been investing with Lending Club for over a year now, mostly picking debt consolidation or home improvement type loans without anyone defaulting.
    Hope this article doesn’t start a trend of shady car buyers thinking this is free money for them.

    • 0 avatar
      kvndoom

      CTS-V wagon, HEEERE I COME!!!

    • 0 avatar
      Lokki

      I’ve never heard of Lending Club. Can you expand a little on it please? Off-hand it sounds a lot like the usual “And the lions shall lay down with the lambs…” schemes which work great for a while.

      EDIT: OK, thanks; I’ve gone to the site.

      My summary would be that borrowers solicit loans and promise a given rate of interest in return, which rate seems – based on quick reading – to depend on credit score and difficulty of attracting investors.

      Lenders can agree to invest in loans of varying grades and rates of return – the higher the risk, the higher the rate of return. Risk on each loan is limited by the fact that the lender only invests in $25 shares of each loan. Since shares are small borrowers will need to attract multiple investors (4 per $100) to get a loan. This need to attract puts upward pressure on proffered rates of interest.

      In the meantime Lending Club wins by collecting fees. They’ve started a bank with very little investment of their own money – brilliant on their part.

      I honestly have no idea if the rates being offered to borrowers are good enough to be attractive. The rates of return to lenders sound OK (9.3 percent or so?) before taxes, I’m not so sure they’re worth the risk for the net
      returns. Of course, I’m not much of a gambler, so perhaps I’m wrong but there doesn’t seem to be much real data beyond a FICO range and some proprietary formula based grade of A to G.

      This will be fun to watch but I’ll probably never do more than that.

  • avatar
    Advance_92

    I would like a better idea of what’s going on here. Is this lending club somehow providing security for a loan but not obligated to do anything if the borrower doesn’t pay?

  • avatar
    brettc

    I’ve never heard of Lending Club either. It looks like maybe it’s similar to prosper.com based on a quick glance at the site.

  • avatar
    stickman

    Advance_92, no. They have an escalating collections process but as Steven points out, no collateral. It is pretty clear on their website that a portion of borrowers do default and they have some aggregate data on how overdue some of the payments have been. The process is documented on their website but basically round 1 is to contact the borrower and see what can be worked out, round 2 is (re)negotiate terms, and round 3 is collections/court.

    strafer, as an investment, how do you like it? I have been intrigued enough to review their website and prospectus multiple times but I just can’t quite get up the nerve to partake. It intrigues me quite a bit and the returns seem pretty good. I like how they have different grades of investment for those who want more or less risk. If it’s not too much to ask, you mention you’ve had no defaults in a year, are you only investing in Grade A — which investment option did you pick?

    • 0 avatar
      strafer

      Originally started as a loan for a family member starting a business, most of which was fulfilled by other club members and I loaned what was left to fill.
      As the monthly payments are made to my account, been reinvesting mostly in 36 month grade B loans, and getting between 9-10 % ROI.
      Some of the loans had been paid off in several months, way before the 36 month maturation.

  • avatar
    1000songs

    Forgive my ignorance, but what are you on about here? If you borrow money from Lending Club and buy a car “you will also be a de facto thief, a degenerate, a lowlife, a schmuck and a parasite of the modern world.”

    What? Why? Huh?

    I definitely missed the point here. I’ve re-read your article 4 times now and have given up.

    • 0 avatar
      Toad

      Same here. I re-read it and did not get it either. The second to last paragraph left me completely baffled.

      • 0 avatar
        Steven Lang

        A little clarity for you.

        “No lien means no immediate opportunity for the lenders to retrieve the car if you default on the loan.”

      • 0 avatar
        Russycle

        I interpret Steven as saying if you buy a car with a loan from Lending Club and don’t repay the loan you will be a thief, schmuck, etc. But you’ll have a free car, and there’s not much Lending Club can do about it.

      • 0 avatar
        Toad

        “What are the costs should you default on your loan? Well, I would consider it the same as when you have a douchebag ex-partner. Except in this case you are that douchebag.”

        Still confused. Who is doing what to whom? In the last two paragraphs the actions and impacts to both parties are commingled.

        Otherwise, I really enjoy your work. Hope the flu passes.

    • 0 avatar
      Dynasty

      You borrow x amount of dollars from Lending Club and promise to pay it back at a certain %, per your loan agreement.

      You use the money to buy a 2013 Saab 9000.

      You break your promise to pay the loan back to Lending Club.

      Lending Club has no recourse other than dinging your credit score.

      You now have a free car, as they cannot repossess it.

      Does Lending Club lend enough out for me to buy an expensive house? I think the credit ding might be worth it to be mortgage free AND have a nice house.

    • 0 avatar

      There appears to be a sentence missing saying “if you use Lending Club you may as well not pay the loan back because there’s no collateral”. The article jumps straight from what appears to be an ordinary car loan, to calling everyone a thief without mentioning you have to stop paying to get from the former to the latter.

  • avatar
    Lokki

    Steve –
    I think that perhaps the last two paragraphs should be combined together. I think that the readers (confused above) are missing the connection between the 2nd to last paragraph (what happens if you default) and the last paragraph about being scum. They’re reading it independently and coming to the conclusion that anybody who takes a Lending Club loan is scum – which is not what you probably meant.

  • avatar
    silverkris

    Isn’t this somewhat analogous to revolving credit associations that are common in Chinese, Koreans and Indian immigrant communities? That is, they pool up some money and let members have a turn at getting loans? The members are all mutually known in the community, which helps hold people accountable though from time to time there are scofflaws that run off with the money.

    • 0 avatar
      Lokki

      There’s a slight difference between the Asian/Indian bank clubs and Lending Club. I offer this ancedote:

      I first heard of the immigrant club banking system when a Korean dry cleaning store in the neighborhood where we lived burned down. It came out in the news that an 80 year-old man had walked into tbe place with two buckets of gasoline and torched the place. Next it came out that the old man was Korean, and next that he had terminal cancer and only a few months to live. Finally it came out the the store-owner had welshed on a loan to the loan group. Lending club, on the other hand, will send you a -harshly- worded letter.

  • avatar
    Pch101

    All sorts of loans are unsecured, such as most credit cards and corporate bonds. Presumably, the risk associated with the lack of security has been offset with underwriting and a higher interest rate.

    Personally, I’ve never heard of it before it. Is this becoming a common way to finance car purchases?

    • 0 avatar
      Dynasty

      It is an alternative to the traditional lending model. I first read about, and looked into investing in, this concept back in 2007 or 08.

      I mainly remember seeing people wanting loans for boob jobs and other frivolous things, who also had very poor credit. The last person I’m lending money to is some chick with low self esteem, bad credit, and soon to be working the amateur night circuit at strip clubs.

      • 0 avatar
        Pch101

        “It is an alternative to the traditional lending model.”

        Sure, it sounds like a westernized version of the microcredit concept.

        I’m just not sure why Mr. Lang wrote about this. Is this gaining market share in the used car sales business? Or is he just surprised that anyone would offer to make loans without requiring collateral?

      • 0 avatar
        Steven Lang

        ““It is an alternative to the traditional lending model.”

        Sure, it sounds like a westernized version of the microcredit concept.”

        It’s not. Many of the loans are north of $10k and the issuing of unsecured AUTOMOTIVE loans is a novelty to say the least.

        I have seen cases where folks have been able to buy really cheap cars using their credit cards. But those deals that are into the five figures using unsecured credit have pretty much been rare to non-existent. As someone who used to liquidate over 10,000 vehicles a year for an auto finance company I can tell you that there is a very good reason for that.

        “I’m just not sure why Mr. Lang wrote about this. Is this gaining market share in the used car sales business? Or is he just surprised that anyone would offer to make loans without requiring collateral?”

        It represents a deficiency in their lending practices which should be tended to. Peer to peer lending definitely has it’s merits. But some loans (those involving big ticket consumer loans such as home equity and auto loans) need to have collateral in order to avoid a worst case scenario.

      • 0 avatar
        Pch101

        “It’s not. Many of the loans are north of $10k and the issuing of unsecured AUTOMOTIVE loans is a novelty to say the least.”

        Microfinance involves making non-traditional loans to non-traditional borrowers (the poor in developing countries.) Some of it has involved peer-to-peer funding. Here’s an example of such a company: http://www.microfinancefocus.com/news/2010/02/07/zidisha-set-to-expand-in-peer-to-peer-microfinance-julia-kurnia/

        What you’ve described sounds like a similar concept, but the borrowers are American and the amounts are correspondingly larger. (I don’t suspect that there are many Americans who want to borrow $500 in order to purchase some goats, for example.)

        “It represents a deficiency in their lending practices which should be tended to.”

        Aside from who is doing the lending, there doesn’t seem to be much difference between this and one taking a large cash advance on a credit card, something that those of us with sufficient credit have been able to do for years. Credit card cash advances are also unsecured. Smart lenders of unsecured debt will underwrite their borrowers, and then charge an interest rate and have repayment terms that reflect the risk.

        Are a lot of people buying cars this way? Again, I’ve never heard of this particular company.

      • 0 avatar
        jmo

        “But some loans (those involving big ticket consumer loans such as home equity and auto loans) need to have collateral in order to avoid a worst case scenario.”

        If I’m traveling for work all four weeks, Amex might lend me up to 20k per month, unsecured. They can’t repo my plane tickets, hotel rooms and rental cars – is that some sort of deficiency in their business model?

      • 0 avatar
        Steven Lang

        “If I’m traveling for work all four weeks, Amex might lend me up to 20k per month, unsecured. They can’t repo my plane tickets, hotel rooms and rental cars – is that some sort of deficiency in their business model?”

        That would make you a super-prime customer who would have no need for this type of service.

        Folks who use large amounts of credit and always pay on time will usually have very high credit scores.

        The exact opposite is true of you currently have very small levels of credit (for example $2000 or less), have a large balance, and always pay late.

        You described an apple. LendingClub and other P2P groups try to appeal to the oranges.

  • avatar
    Lokki

    The part I get confused about is how people think that getting one loan for 60 months for $25,000 at 22.45 percent is a better deal than a bunch of credit card debt at 15%.

    I admit to not being very good at math and not having much experience in this arena….. but I don’t get it.

    For that matter, I don’t understand why people it’s a good idea to make a loan at 22.45% to somebody who is having trouble paying back 15%.

    “What is the total balance of your credit cards, interest rates and current monthly payments?
    A: (02/17/2012-06:43) – Citibank 8400 15% 163
    Citibank 3400 15% 85
    Chase 4000 15$ 97
    USAA 12000 15% 259
    GMC Bank 300 15% 25
    total $28,100”
    ***

    Loan payments are currently $629. Under the new loan the amount due is $650.20 monthly, and note that this is on $25K, leaving another $3,100 at 15% still out there.

    • 0 avatar
      piojos

      The credit card payments are minimum payments. They do little or nothing to reduce the principal owed. Theoretically, if the borrower paid of the cards immediately, and then made the monthly lending club payment,her debt could be eliminated.

  • avatar
    axual

    The other definition of this is gambling.


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