Archives for February 2009

Setting Long-Term Financial Goals: Looking Back 5 Years

Some readers have noticed that I am no longer tracking the progress towards my long-term financial goal. That’s because I don’t have one! It used to be a million dollars by age 45, but I have dropped it since it doesn’t motivate me on a daily or even monthly basis.

I have come to realize that it is just stupid for me to plan out something 15 years ahead. Even looking back only five years, my life now is vastly different than I thought it would be. It’s an interesting exercise.

On February 27, 2004:

  • I was 6 months out of graduate school, and in working at my first “real” job. Although I had held several jobs earlier including being a student researcher and teaching assistant, the corporate world was completely new to me. Even then, I knew I didn’t want to do this for four decades.
  • My net worth was hovering around zero… I was just about done finally paying off my student loans from undergrad, but that was about as far as I was looking. Here’s an updated net worth history chart:
  • I was single. Although I was engaged at the time, I had never lived with my fiancee and had no idea what it would be like to completely share a life together. It’s been quite an adventure.
  • I didn’t have this blog. I don’t even know if I knew what a blog was. Who knew that it would provide a non-trivial chunk of our total income, and that I would continue to spend at least 20 hours a week of my time maintaining it, and often much more (although I’ve been working on better balance).
  • I didn’t own a home. I was still living in the same cheap, run-down, graffiti-covered apartment that I lived in during college. I would end up renting five different apartments in the next 5 years, before finally buying a house.

I’m actually really happy with how things turned out, but looking ahead there is still so much more uncertainty. Kids? Jobs? Economy? So I’ll have to keep that in mind when crafting a measurable, specific, and inspiring long-term goal. Are you surprised at where you’re at now, compared to five years ago?

$8000 Housing Stimulus Tax Credit: Requirements and Common Questions

Still lots of questions about the $8,000 First-Time Home buyer Tax Credit. Here are some answers:

What is the definition of a first-time home buyer?
You are considered a first-time homebuyer if:
– You purchased your main home located in the United States after April 8, 2008, and before December 1, 2009.
– You (and your spouse if married) did not own any other main home during the 3-year period ending on the date of purchase.

Do I have to pay the homebuyer tax credit back? How much is the credit for? $7,500 or $8,000?
It depends. For homes purchased in 2008, the $7,500 credit (or 10% of purchase price, if less) operates much like an interest-free loan. You generally can repay it equal installments over a 15-year period unless you move out or sell the home earlier than that. The maximum credit is reduced to $3,750 for married individuals filing separately.

For homes purchased in 2009, you must repay the $8,000 credit (or 10% of purchase price, if less) only if the home ceases to be your main home within the 36-month period beginning on the purchase date. The maximum credit is reduced to $4,000 for married individuals filing separately.

What is the definition of main home? Does a condo count? How about an RV?
Your main home is the one you live in most of the time. It can be a house, houseboat, housetrailer, cooperative apartment, condominium, or other type of residence.

What if I don’t owe or pay any income taxes?
This is a refundable tax credit, which means that even if you don’t owe any taxes, you will receive the credit amount via check or other means. For example, if before this credit you had a tax liability of $5,000 and withheld $4,000, you would owe the IRS $1,000. If you qualify and claim a $8,000 tax credit, you would now receive $7,000.

What are the income restrictions?
The amount of the credit begins to gradually phase out for taxpayers whose adjusted gross income is more than $75,000, or $150,000 for joint filers. It is completely phased out when your AGI is $90,000, or $170,000 for joint filers.

Can I just buy a home from a relative and pocket the $8,000?
You don’t qualify for the tax credit if you bought the house from a “related person.” According to the IRS, a related person includes:

  • Your spouse, ancestors (parents, grandparents, etc.), or lineal descendants (children, grandchildren, etc.).
  • A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock of the corporation.
  • A partnership in which you directly or indirectly own more than 50% of the capital interest or profits interest.

How do they determine the purchase date as applied to the cutoff dates?
If you bought an existing home, the date of purchase is your closing date, not the day that you sign a purchase contract or enter escrow. If you constructed a new home, you are treated as having purchased it on the date you first occupied it. (Seems like some wiggle-room here.)

What IRS Form Do I Have To Fill Out? Can I File For 2008 or 2009 Tax Years?
That would be the new revised version of IRS Form 5405 (where most of this information is from), which you fill out and attach to Form 1040. Any updated tax preparation software should be able to handle this. If you already bought your house in 2009, you can file either on your 2008 or 2009 tax returns. (Why not get it now?)

What if two unmarried people buy a house together?
If two or more unmarried individuals buy a main home, they can allocate the credit among the individual owners using any “reasonable” method. The total amount allocated cannot exceed the smaller of $7,500 ($8,000 if you purchased your home in 2009) or 10% of the purchase price. A “reasonable” method is any method that does not allocate all or a part of the credit to a co-owner who is not eligible to claim that part of the credit.

I am not a U.S. citizen. Can I still claim the tax credit?
If you are a resident alien according to IRS Pub 519 and satisfy all the other requirements, then yes you can claim the credit. Nonresident aliens are not eligible.

Book Review: Pilgrimage to Warren Buffett’s Omaha (Berkshire Hathaway Annual Meeting)

There are hundreds of books about how to invest like Warren Buffett. For whatever reason, I haven’t read any of them (yet). For one, if really wanted to invest like him, why not just invest with him and buy a share of Berkshire Hathaway? A Class B share recently traded at around $2,300, more than 50% off its high of $5,000. And if I bought a share, I could attend those annual shareholder meetings in Omaha, Nebraska* that I’ve heard so much about. (I have read some of the shareholder letters.) Buffett himself calls it the “Woodstock of Capitalism”.

What’s a Berkshire Hathaway Annual Meeting Like?
That’s the question behind the book Pilgrimage to Warren Buffett’s Omaha by hedge fund manager Jeff Matthews. He first went to the 2007 annual meeting and wrote about it on his blog. I guess people liked it, and so he went back in 2008 and weaved it all together into this book.

A very distinguishing trait of the annual meeting is that Chairman Warren Buffett and Vice-Chairman Charlie Munger not only want their shareholders to attend, but willingly sit down for a six-hour long Q&A session where you can ask any question, and they will answer it personally. Many of the famous quotes you’ve read elsewhere were first spoken in this format, and the best part of this book is probably reading about their thoughtful responses to all these questions.

Another feature I didn’t know about is that the meeting is also highly profitable for Berkshire. Shareholders are given special tours and discounts to subsidiaries like Nebraska Furniture Mart, Borsheim’s Jewelers, and so on. Estimates say that over $100 million is spent there.

What Else Is Inside The Book
A lot of the book is in informal “blog” format, with Matthews recounting his first-hand experiences down to grabbing lunch or renting a car. However, sprinkled throughout the book are also facts and tidbits about the company and Buffett, most of which I didn’t know very well but are things that I’d expect a die-hard fan to know already. It worked well for me and provided some helpful background.

For example, I learned that the businesses with Berkshire Hathaway tend to operate independently and without much oversight from Warren Buffett or Charlie Munger. And it’s a wide variety of stores – from GEICO insurance to See’s Candies to NetJets to Nebraska Furniture Mart. Berkshire also gets the chance to buy many profitable, well-run, private companies at a discount from the individuals and families that created them. Why? Because they are attached to these businesses, and want them to remain under a certain quality of stewardship.

But it’s not a total slurp-fest. Criticisms are brought up, like how Buffett has called derivatives “financial weapons of mass destruction”, but also bought millions worth anyway. Or when he talked up the values of executives for subsidiary General Re who later got convicted of securities fraud.

Summary
This book is well-written, easy to read, and a perfect companion for a cross-country airplane trip or nightstand. However, I don’t think I really learned much of anything practical from a financial perspective. I’d treat it mostly as entertainment.

To be clear, it is not a book on value investing. For that, stick to the classic The Intelligent Investor by Benjamin Graham. Nor is it a book about the personal life of Warren Buffett. For that, there is now The Snowball.

Actually, the book I most want to read next is Poor Charlie’s Almanack, which contains many quotes from Charlie Munger, who seems a bit abrasive but I have come to respect him as an independent thinker. The only problem is that the book doesn’t seem to be in print anymore and used copies are fifty bucks? Time to hit up the library.

I’m still wavering as to whether I want to attend this meeting. Would it be worth the hotel and airfare? Anyone planning on being in Omaha on May 2, 2009? 🙂

* Actually, you don’t even need to be a shareholder to attend any more. Buffett got annoyed that people were scalping tickets on eBay for $100+, so every year he floods eBay with tickets for only $2.50.

More Fun With Charts: Credit Crisis Edition

Here a new time-waster: From the creators of LOLCats, GraphJam allows users to create charts that are funny and vote up the best ones. Two appropriate ones:

I guess this explanation is patronizing then? And after yesterday…

(Yes, the x- and y- axes should be reversed…)

I’m sure one of you all could think of something funnier… 🙂

Conservative 529 Options: CollegeSure Tuition-Indexed CDs vs. Inflation-Protected Bonds (TIPS)

Recently, I have been exploring the “safe” options inside various 529 plans. This would be a good choice for those who want to feel like they are making continuous gradual progress and avoid the swings of the stock market, similar to what is offered in pre-paid tuition plans in certain states like Florida. The problems with those plans are that they are usually limited to residents only, and your kid often has to go to one of the in-state schools to get the guaranteed tuition benefit. One unique pre-paid type of plan is the Independent 529 plan, but it is also restricted to certain schools (mostly private liberal arts colleges).

Next, there are plans with guaranteed-return funds backed by insurance companies, or certificates of deposit from banks. However, these types of investments are still subject to inflation risk. If a period of high inflation occurs, your returns could be squashed. Even with current deflation concerns, given current government policy I think high inflation in the future is still a potential concern.

So what’s left?

CollegeSure Tuition-Indexed CDs

Offered by the College Savings Bank, these are FDIC-insured certificates of deposit which offer an interest rate linked to college tuition levels. The CollegeSure CD earns an annual percentage yield (APY) over the life of the investment that is 3.00% less than the college inflation rate. (For a while, this margin was only 1.5%.) These are only available through either the Montana or Arizona 529 plans, but you can use the proceeds towards a school in any state.

The CDs are available in maturities ranging from 1 to 22 years, so you are basically pre-paying tuition at a fixed premium. Here’s an illustration from their site:

Changes in costs are tracked by the Independent College 500 Index (IC500), which is derived from the average tuition plus housing costs of 500 private colleges. Over the last 10 years, the college inflation rate has been 5.4% annualized, Over the last 20 years, it was 5.7% annualized. Of course, this is just an average and it both excludes public universities and ignores the average aid packages given out, but it seems to be a reasonable index.

Treasury Inflation-Protected Bonds

Treasury Inflation-Protected Securities (TIPS) are bonds that promise you a total return that adjusts with the CPI index for inflation. Very generally, it works like this: if the stated real yield is 2% and inflation ends up at 4%, your return would be 6%. TIPS are issued and backed by full faith of the U.S. government. Right now, they are only available in 529 plans in the form of mutual funds like the Vanguard Inflation Indexed Bond Fund. Some plans offer them as part of their age-based investment mixes, but a few offer them as standalone investment options. The Ohio 529 plan ($25 bonus) looks to offer the cheapest option, with an annual expense ratio of 0.32%.

The actual real yield you get varies, but here is some historical market data for a maturity of 10-years, which is close to the average mutual of the Vanguard fund:

To make a rough estimate, I’d say you average about 2% real before fees. After about 0.3% in fees, you’d end up with 1.7% + inflation.

Inflation is tracked here by the CPI-U (Consumer Price Index for All Urban Consumers), a number tracking the price of a wide basket of goods and services. From January 1999 to January 2009, the annualized inflation rate was about 2.5%. Over the last 20 years, it has been about 3.0%.

It does not focus on college tuition, or even include it explicitly as far as I know. However, there should be some correlation to college tuition.

So which is better?

Would you rather have:

Overall Inflation plus 1.7% or College Inflation minus 3%

If we use the average numbers from the last 10 years, the CollegeSure CD would have earned roughly 2.4% annually and the TIPS fund would have earned roughly 4.2% annually. This would seem to tilt in favor of TIPS, but there are two problems:

  • Unlike with the CollegeSure CD, you can’t match the maturity of the TIPS fund with your goals. It’s more or less fixed at 10 years forever. For example, if you only have 2 years left until college, you might want to start moving money out because you can still lose principal in the short-term due to interest rate fluctations.
  • If the rate of college tuition rises significantly higher than overall inflation by greater than 4.7% a year, then the TIPS fund would fall short.

One could always split money between the two as well, but for not I’m just investing in the TIPS. College inflation may continue to outpace overall inflation (or it may not), but I doubt it will do so by more than 4.7% a year for an extended period. Also, I believe that investment options in 529s will only improve with time. One day, I expect to be able to buy individual TIPS to more closely match maturities with our time horizon.

This is not to say I’ll necessarily be 100% TIPS – I’ll most likely throw a bit of stocks in there – but I think it’ll be a big component of our plan.

Nice & Simple Explanation of the Credit Crisis

By now, most of us have some sort of idea of what caused the current financial crisis. Some notable attempts at a simplified explanation include these Powerpoint slides with stick figures, this British comedy routine, and the “Giant Pool of Money” NPR audio broadcast. Even the New York Times had a go.

Well, here’s one more by Jonathan Jarvis, which also happens to be excellent. If anything, it surely has the best animation and graphics of them all. Also available in high-definition (but it’s big). Via Bogleheads.

Ohio CollegeAdvantage 529 Plan: Free $25 Opening Bonus

The Ohio CollegeAdvantage 529 Savings Plan is again offering a $25 refer-a-friend bonus if you open an account and deposit at least $25 by May 31, 2009. You can be a resident of any state, and there are no application or annual fees.

First Impressions
My own account with them has been open for a few months, and so far I am quite impressed with the Ohio plan. The website itself is functional and fast, there are a variety of investment choices (cash, index funds, active funds), they are upfront with the fees, and the expenses are very competitive – either the lowest or near the lowest in the nation. The only bad thing I can think of is that every time I make a purchase I get a snail-mail confirmation with no paperless option, which seems wasteful. A more detailed review is upcoming.

I have gotten the $25 bonuses plus several referrals, with no complaints from the people I referred. I have also started an auto-debit from my checking account for $50 a month. Right now, half of my 529 is in the Vanguard inflation-protected bond fund. This is an investment option that is unavailable in most state plans. I feel that since college is only at most 18 years away with a big lump-sum payment, I would prefer less volatility while marching towards that goal. This is in contrast to saving for retirement, where I currently have 35 years until I turn 65, and hopefully another 20 years after that as well.

Referral Bonus Instructions
Both the referred and referree get $25, and I’d love for you to help fund my kid’s college dreams. 😀 Here’s how:

  1. You can enroll online or via mail. The online process was quick and easy, and I didn’t have to mail in anything.
  2. The first step is to input your personal info and choose a login/password. Next, you’ll verify your e-mail and complete the application.
  3. After that, you’ll choose your funding amount and select an investment fund. Your initial deposit must be a least $25, and is funded using the account/routing numbers of your bank account. At the bottom, you will need to enter a referral code to get the bonus. Enter *.
  4. In 1-3 days, your initial deposit will be sucked out, and in 5-7 business days you will get your $25 bonus. The $25 will be deposited directly into the 529 account, and will be invested in the same thing as your initial deposit.

I opened the account back in November and got my $25 bonus successfully and as promised:

* Javascript is required. If you can’t see any numbers, please use 2439350.

Don’t Be Stupid When Chasing Higher Yields

One of my biggest financial pet peeves is when people refuse to realize the connection between return and risk. Whenever you see an investment that offers a “guaranteed safe” or “insured” return that is significantly above what an FDIC-insured bank can offer, it’s safe to assume that your risk has gone up.

The latest example is the Stanford Investment Group, which the SEC accuses of massive investment fraud:

SIB has sold approximately $8 billion of so-called “certificates of deposit” to investors by promising improbable and unsubstantiated high interest rates. These rates were supposedly earned through SIB’s unique investment strategy, which purportedly allowed the bank to achieve double-digit returns on its investments for the past 15 years.

Do the math, people! Double-digit returns + a bank based offshore in Antigua + no FDIC-insurance = Either fraud or risk to principal. And remember, in schemes like these the interest is always very reliable, coming every single month like clockwork…. until one day it doesn’t. Been that way since the real Ponzi.

And there are plenty more to replace SIG, just Google “high yield CD”. Back in 2005, there was American Business Financial Services, which imploded. Now there is Millennium Bank (based in St. Vincent), Zannett Notes, and CPS Notes. All offer well over 8% interest.

Now, I am not accusing any of these companies of fraud. There is a difference between fraud and plain old credit risk. In both bases, you might manage to cash out before things fall apart, but there’s also a real chance you might never see your money again.

But especially in times of low interest rates, people start to look for just a bit more yield. Even SmartMoney magazine has gotten caught up in the act. Check out their cover this month.

A sure 7%? What, from buying shares of stocks with temporarily jacked-up yields like Altria or Vodafone? How about a highly speculative 7%? Bank of America had a really nice dividend yield as well once upon a time… before it got cut to a penny. Dow Chemical just cut its dividend for the first time in 100 years. Add in the fact that your share price could drop as well, and I’d keep your emergency fund far away from these stocks.

Chart Comparing Historical Bear Market Periods

Via Calculated Risk, Doug Short has a series of charts comparing the movements of various bear markets. The one below compares the Dow starting in 1929 (Great Depression), the S&P 500 in 1973 (Oil Crisis), S&P in 2000 (Tech Crash), and the current bear market starting in 2007 (do we have a moniker yet?).

Click on image for larger version.

I wouldn’t read too much into them, although I do have a thing for pretty charts. 😉 If anything, I suppose we should be prepared for at least another year of fun:

Reinhart and Rogoff mention a three-and-a-half-year average peak to trough decline in equities for past financial crises. As of today, the market peak of October 9, 2007 was about 16 months ago — which would put us well shy of the half-way mark for the average crisis.

Measuring Prosperity: What Is Social Capital?

There are many forms of capital. Besides the usual definition of business capital (money), there is physical capital (a car, house, or other useful tool), human capital (your skills and education), and also social capital. According to Wikipedia, this describes the value held within our relationships with other individuals and larger social networks.

One of the books I am currently reading is Simple Prosperity by David Wann (co-author of Affluenza). Inside, there is a nice quote about social capital:

It is inevitable that our society will once again give higher priority to belonging and lower priority to belongings.

Look at the results of a study by the National Science Foundation, which found that one-fourth of all Americans say that they have no one that they can discuss personal problems with. Not one person. This number has doubled since 1985. One in 32 people is either in prison or on parole. If our ultimate goal is to be happy and fulfilled, then this can’t be a good trend.

Sociologist Robert Putnam believes the following are indicators of social capital:

  • How many of your neighbor’s first names do you know?
  • How often do you attend parades or festivals?
  • Do you volunteer at your kid’s school? Or help out senior citizens?
  • Do you trust your local police?
  • Do you know who your U.S. senators are?
  • Do you attend religious services? Or go to the theater?
  • Do you sign petitions? Or attend neighborhood meetings?
  • Do you think the people running your community care about you?
  • Can you make a difference?
  • How often do you visit with friends or family?

It has been argued that growing social capital can keep you healthy, make schools more productive, reduce crime, and even raise home prices in a neighborhood. Perhaps the best thing about social capital is that “the more you spend, the more you have”.

American Recovery and Reinvestment Act of 2009 Highlights

The House and Senate have reached an agreement on the American Recovery and Reinvestment Act of 2009, better known everywhere as “that huge stimulus bill“. I couldn’t stop myself from taking a peek. Here are some details that directly affect most taxpayers:

“Making Work Pay” Tax Credit: $400 per person, $800 per family
Apparently it won’t be sent out as a lum-sum check this time, but will directly increase your paycheck as an extra $13 a week in take-home pay starting in June (since it is retroactive to 2009), falling to about $8 a week in January 2010. I tend to think a lump-sum would have more “bang”. Starts to phase out at $75,000 modified adjusted gross income for single filers, $150,000 for married filing jointly.

“Not Working” Tax Credit: $250 per person
For retirees, disabled individuals and others who don’t work, they will receive a one-time $250 payment. This will probably be a check in the mail.

$8,000 First-Time Homebuyer Tax Credit
Although there was talk of a $15,000 tax credit for all homebuyers, it looks like it was greatly reduced and still restricted to first-time homebuyers. Starts to phase out at $75,000 modified adjusted gross income for single filers, $150,000 for married filing jointly.

If you bought your house between April 9, 2008 and December 31st, 2008, the first-time homebuyer tax credit remains at $7,500 and you will have to pay it back over 15 years, or when you sell the house. If you bought your house after January 1st, 2009 and before December 1st, 2009, the credit is now increased to $8,000 and you will not have to pay it back as long as your live in it for 3 years.

New Car Tax Deductions
If you buy a new car, you can deduct the interest you pay on your loan as well as the taxes you paid on it (on up to $49,500). Starts to phase out at $125,000 modified adjusted gross income for single filers, $250,000 for married filing jointly.

…and a whole lot more, including expanded unemployment benefits. An example of a tiny tidbit that got mixed in? In 2009 and 2010, you can now use your 529 plan money to pay for “computers and computer technology”, which could include peripherals, software, and even broadband internet fees.

Reader Questions: Lending Club Peer-to-Peer Lending Q&A

Back in December, I wrote a detailed review of the “new” LendingClub, a site which lets individuals lend money directly to other individuals and earn 7-20% interest (depending on credit scores). Many of you sent additional questions about LendingClub, and Rob Garcia, Director of Product Strategy, was gracious enough to answer them. I want to thank Rob for his time and candidness, as some of the questions were quite blunt. 🙂

Some of my readers are concerned about your company being in its early stages. What would happen if Lending Club goes bankrupt? What would happen to our notes in that scenario? Would we be unsecured creditors of LC?
Yes the notes are unsecured obligations of Lending Club. That being said, we’ve structured the program in a way that makes it as “bankruptcy remote” as possible: all lender funds are kept in a trust account that is not part of Lending Club assets, and therefore would be off-limit to other Lending Club’s creditors. We also have a back-up servicing agreement in place with Portfolio Financial Servicing Corporation (www.pfsc.com), one of the largest loan servicer in the country, who will service the loans should Lending Club be unable to do so.

Any insight to why the income and net worth requirements are somewhat restrictive for lenders?
This comes from state regulations; most states impose financial eligibility requirements for clearing new types of securities offerings. We are hoping that some of these requirements will be lifted as the program continues to build its track record. As pointed out in a recent Javelin study, the average annual return for Lending Club lenders has been 9.05% over the last 18 months, with little volatility. If we continue showing that sort of track record over a long period of time, we hoping the financial eligibility requirements will become unnecessary.

Do you expect to add more eligible states soon?
Yes. We are actively pursuing registration in states where the offering has not yet been cleared. Note that residents of most states who haven’t been cleared for the main offering can already buy notes on the Note Trading Platform from FOLIOfn.

Can I just take the current $25 bonus and run? [See below]
You certainly can, although we’d love you to try Lending Club.

Is there plans to fund via PayPal or some other more instant form of funding? I saw a loan I wanted last week, but had to wait 4 days for my bank deposit to clear and missed it.
We do offer this capability, but only to lenders who do not have a linked bank account. Once a bank account has been linked, it is a lot more cost-efficiently (although admittedly longer) to move funds by ACH.

Any plans to pay interest on idle cash?
Not immediately. Believe it or not, there are lots of regulatory challenges for a non-“deposit taking institution” like Lending Club (basically not a bank) to pay interests on idle funds. It is in our interest to do so to attract more lenders, so we are looking for a way around (along the same vein as what PayPal is doing) and are confident it will come through.

I have several old loans from Lending Club still in repayment. However, after the new regulations, I am no longer eligible to lend due to both my state of residency and income. Any idea what might happen to my loans? I don’t want to ask Lending Club in case they close my account…
No worries; we’re not closing anybody’s account! All “old” loans continue to be serviced and all lenders get their monthly payments credited to their account irrespective of their state of residence. The new restrictions only restrict the ability to buy new notes.

— End of Interview —

Follow-up Updates and Comments
Here is a excerpt from the Executive Summary of the noted Javelin study, which notes both pros and cons:

If an individual had invested $10,000 on June 1st, 2007 in a representative group of loans on the site, the value of that individual’s account at Lending Club would have grown to $11,594 by November 2008 (assuming reinvestment of payments received). That return would have outpaced other common investments or indexes such as the Standard & Poor’s 500 Index ($6,289), the Nasdaq Composite Index ($6,605), 1-year CDs ($10,678) and 6-month Treasury bills ($10,501). This comparison factors in Lending Club’s 1% service charge but does not include fees and other transaction costs for the other investments. This comparison does not factor in differences in liquidity between Lending Club notes and the other investments or indexes. Notably, Lending Club notes can only be sold through the Note Trading Platform that was made available recently (on October 14, 2008) and there is no assurance that liquidity will develop on that platform.

Over the last few months, we have seen credit card companies canceling inactive cards, reducing credit limits, and raising rates on lots of borrowers. As a result, I have definitely seen a rise in loan volume at LendingClub.

As a lender, I’ve tried to take advantage by slowly investing in lots of small $25 loans to folks with squeaky-clean credit histories and good job histories, and now have about $1,000 lent out. I understand there is risk involved, and will report my results. I do wish the PayPal funding option was always available, as the convenience would be great. Also, another reader pointed out that if they accepted PayPal, one could fund with a credit card for the rewards.

If you are interested in lending, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you don’t have to deposit anything. After you are approved, the $25 should show up in your account balance, and you can lend it out immediately.