Would You Invest Your Money With Me Directly?
I know sometimes some of my ideas are a little extreme. I realize this could be one of those, but I thought it would be worth asking. Otherwise, I’ll just keep thinking about it. Forever. Literally.
I’m a big fan of the Lending Club business model to eliminate the bank, (which reminds me – don’t forget to get your Lending Club $25 Sign Up Bonus if you haven’t already).
However, while social lending has eliminated the bank, they’ve essentially created another middleman, adding another layer of fees.
In addition, I’m constantly scouring the internet looking for places for you to safely stash your money, which is probably SmartyPig or an Ally Bank CD right now, even though they’re in the 2% range.
At the same time, I’m always looking for sources of money to leverage our mortgage, investments, and business developments.
Then it occurred to me, why not just offer readers private investments or loans with me directly?
Brilliant, right? Or have I totally lost my mind? I realize the concept could be far fetched, but the more I thought about it, the more it seemed like a possibility.
Here’s how I think it might work. I offer readers a fixed rate loan that pays higher than the current bank rates, but lower than I can get access to commercial lending. It’s a win-win. Higher rates for you; lower leverage costs for me. And I provide a valuable service for readers.
I realize that it wouldn’t be FDIC insured, so that might be a deal-breaker for you. I’d probably have our lawyer draw up the contracts to make sure both parties are protected.
Is this legal? I have no idea. Will the administration of it from my end be a pain. Maybe. Are you interested? That’s what I’d like to know.
So tell me. Would you do it? What would influence your decision? What kind of terms would you like to see?
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I think that is a great idea because I have money to invest but my credit stops me from being able to invest with the Lending Club.
Marie, last time I checked, Lending Club only checked credit for borrowers. Did you try the lending side?
I think it’s a great idea too! But yes, it could get a little complicated from an administrative standpoint. And maybe from a tax standpoint too, though I know you’re a tax genius :D. I would certainly be curious in hearing more about your thought process!
Jill, you’re too funny! I think genius might be a little overstated though!
The problem is lack of diversification. The right way to be involved in peer-to-peer lending is to be well diversified among a large number of loans. In any market where diversification is possible, no premium is paid for the consolidation of one’s risk. This means that if you do not take advantage of the opportunity to diversify, you are taking on uncompensated risk. Being compensated for your risk is the purpose of investing.
In return for the consolidation of risk you should actually have to offer them a *higher* return. But you don’t have to – you could just take the existing terms from lenders who have diversified their risks via a platform like LendingClub. You are (rightly) unwilling to pay a premium to entice lenders to take an unnecessary risk.
Of course in principle each lender could give you only a small fraction of their P2P lending portfolio, but that probably isn’t realistic for either you or them. The overhead of borrowing a few thousand dollars in $25 chunks would wipe out the gain.
So I don’t think you should do this, on the principle that it would be a bad investment for your readers – regardless of how honest or credit-worthy you are. You can still get hit by a bus, become disabled, have major medical problems, etc.
Ethan,
Very excellent points. I appreciate hearing your thoughts on the diversification. You’re probably right, if it wasn’t me, I’d tell readers not to do this.
I need to find a way to run through the idea without my own thoughts getting in the way (like the fact that I know I’m honest.)
i would only invest in you if you were a brand name like tiger woods or lebron or something. Other than that, no i cannot invest cash on a fellow human being. Good idea though; thinking out of the proverbial box. i like that
Thanks for the feedback! Although, I don’t think I’d want to be invested in the Tiger Woods brand right now!
It sounds like what you’re talking about doing is incorporating a bank. This is exactly what they do, “borrow” your deposits for a measly rate of 1%, then invest in stocks, commercial loans, high-yield bonds, etc.
While I’m no expert, I’m sure that creating a bank like this requires jumping through some regulatory hoops and dealing with an absurd amount of red tape. Plus like you say, not being FDIC insured could be a deal breaker…
When you put it that way, Tim, it does sound like incorporating a bank.
Yikes! Obviously that wouldn’t work. I’m wondering if there are some exclusions for direct personal loans..
This made me smile because you’re proposing to be the opposite of a loan shark. Hahaha.
I’d invest like $500 or less with you, but I wouldn’t want to risk more since you could just die (heaven forbid) and leave everybody in the wind…FDIC insured sounds safer. 🙂
There is a reason that they charge the fee. It would it wouldn’t cover your administration costs of taking care of all of it. Lending is a volume business, you need scale to drive down the cost.
Madison,
I think there are some capital requirements in order to provide the services that you are investigating. Also, not knowing all that the new 2300 page bill that our President just signed… you may have some legal issues.
Madison,
Would be interested in what the tax implications would be. One party may have to claim as income which could hurt for tax purposes. Other than that, I think it sounds like a good idea.
I don’t have the cash to invest but if it was all legal and safely drawn up and I had the cash I would certainly consider a tiny amount to test it out.
I know you wouldn’t. But, this is a classic set-up for a ponzi scheme (someone you trust, offering better than market returns). Be careful, you don’t want law enforcement knocking on your door.
I think it’s a great idea, but that’s exactly what peer-to-peer lending is about. Prosper did a disastrous interpretation of it, while Lending Club seems to be working for both investors and borrowers. The fee they charge (1% to investors) is barely covering their operations. You must consider: collections cost, assessment cost (evluating borrowers), tax implications (is this a loan, a give away, an investment), regulation (is this a bank, a security), etc… not as simple as you make it sound. You’re being naive.
I don’t think you need to incorporate as a bank to loan someone money. Homeowners sell their homes and carry the paper all the time without becoming a bank. All you need is a simple installment loan contract.
I think it’s a great idea and I would trust you. Presumably the loan would be made from your business and would carry forward even if you did (heaven forbid) die.
I also don’t think the implementation would have to be that difficult. It would be quite easy to setup scheduled P2P payments at ING (Capitol One).
Let me know if you are still interested in this. I can’t seem to find any dates on your articles or comments (my only complaint about the site,) so I don’t know if my reply is timely.