Jul 132017
 

Lending Loop Update

Earlier this year I blogged about investing $20,000 in a peer-to-peer lending platform called Lending Loop. My goal was to make 8% return overall, net of fees and write-offs. To be frank I was a little apprehensive at first when I learned about the high interest rates.

I wondered if it was really possible to earn 15% or higher rates of return consistently. Being greedy, I decided to give Lending Loop a try. I primarily invested in B and C loans because they are relatively safer, although the returns are lower than loans in higher risk categories.

Here’s what my Lending Loop portfolio looks like after half a year of investing. This screenshot was taken at the end of June.

As we can see I have made about $846 so far. Yay! 🙂 That’s about 4.2% return, or 8.5% annualized return. This is very much in line with my expected 8% return I had initially set as my goal. I have invested in roughly 30 different loans so far on the platform, each loan averaging $700 of principal. Thankfully none of them have missed a payment yet so I’m really pleased about that. 😀

If this trend continues I should be able to earn a double digit return by the end of the year! But this rosy picture assumes there are no defaults on my loans for the next 6 months. 🙂 Anyway, I will update again at the end of the year so we shall see what happens.

Unlike investments in a tax advantaged account, my Lending Loop returns will be taxed at my marginal tax rate, which is about 30%. This means if I earn 8.5% from the P2P investment, I will only end up making roughly 6% return after tax. To me 6% after tax is pretty good and certainly beats many alternative options out there. 🙂 As interest rates are starting to climb slowly in North America, fixed income investments such as Lending Loop should continue to be attractive for investors looking for yield.

 

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Random Useless Fact:

Due to the lower surface gravity of Mars, if you weigh 100 pounds on Earth, you would weigh only 38 pounds on Mars.

Apr 012017
 

A Real Education About Money

April is officially financial literacy month. Yay! Information is free and everywhere. The problem is some can be misleading. One of my favourite PF gurus, Gail Vaz-Oxlade, recently noticed a slough of pretentious ninnies online pretending to be financial experts.

Personal finance is really popular these days. But I agree with Gail. Real financial advice is rare. I bet dollars to doughnuts many bloggers don’t know what they’re talking about 😛 The current education system is failing the public. This is why I’ve created my high school investing course.

Retiring early should be achievable for anyone. So over the next few months I will be visiting various secondary schools around the city to lecture and teach students how to make money, using other people’s money. 😀 Financial experts such as Robert Kiyosaki have been using this lucrative strategy for decades to make millions. 😉

I was compelled to take on this project after receiving tons of positive feedback from visitors about how reading my blog has made them a lot of money. On my previous post about index investing, one commentator even suggested I charge exorbitant fees to do consulting work, haha. 😉

Let’s be honest. As an authority in this area I should take on a leading role to help others make sense of the financial world. And the best time to teach someone is when they’re young. 😀 I already have years of teaching experience. So naturally I am the best person for this job. 🙂

The Investment Course Outline

For now things are going as planned. After a few meetings with the trustees of the Vancouver School Board I managed to convince them to allow me to give classes to grade 10 students. The course is once a week for 8 weeks. This will be a mandatory part of their Career and Personal Planning (CAPP) program that all students must take to graduate.

Okay. So the first 4 classes will be focused on learning how to use margin accounts to increase stock returns. For example, I started using 2.5 times leverage with margin debt in 2011. By 2014 I showed how my portfolio had doubled in value (100% gain.) This would not have been possible with cash savings alone.

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Mar 202017
 

I’ve been using a peer to peer lending service called Lending Loop for several months now. It allows businesses to access financing from lenders all across Canada (except in Quebec due to excess regulatory hurdles.) There’s about 6,800 investors using the platform so far. I thought I’d share my thoughts about investing in Lending Loop. Discuss the advantages and risks. And answer some common questions readers may have about the process. 🙂


TL;DR

What works

  • Website design and easy to use.
  • Responsive support.
  • Using technology to solve business problems.
  • Reasonable projected returns (5% to 10% pre-tax) on investment given the risk involved.
  • Alternative asset class that is not highly correlated with the stock market.
  • Transparency and thorough reporting.

What can be improved

  • It’s currently not eligible for RRSP/TFSA 🙁 This is a problem due to the asymmetric tax disadvantage of debt instruments.
  • Font on site can be hard to read due to small size and low contrast with background, especially the Q&A sections in the Marketplace.
  • Limited financial history for borrowers. It would be nice to see 4 or 5 year history for more established businesses.
  • Lack of a discussion forum. It could be beneficial for lenders to have an online space to correspond openly with each other about loans in the marketplace. The Lending Loop subreddit has restrictions about what information can be communicated.

Full review below…


 

What is Lending Loop?

There are many small and medium size businesses in Canada that have trouble raising money to expand their operations. Applying for debt can be a challenge because traditional banks are hesitant about lending money to entities with erratic income streams such as restaurants, contracting, etc. Large financial institutions generally can’t allocate the appropriate resources to underwrite small deals with the sophistication they require and struggle to price them according to the actual risk. As a result a lot of high quality deals simply fall through the cracks.

This is where Lending Loop (LL) comes in. It’s a crowd sourcing platform that raises money for growing Canadian companies. Based in Toronto, Lending Loop is Canada’s first (and currently only) fully regulated peer-to-peer lending platform. It operates an online marketplace that connects small and medium-sized businesses that are looking for debt financing with Canadian investors. It allows all investors, regardless of wealth or income, to access a high-yield fixed income asset class.

How Does Lending Loop Work?

Businesses can apply for a term loan product with flexible terms. The amount could be as small as $5,000 and as large as $500,000. Most loan durations are from 3 months to 3 years, but some can be as long as 5 years. Once approved, the loan goes into Lending Loop’s Marketplace where investors have 30 days to fund the project. If the loan becomes fully financed before the funding period expires, the loan will go through a finalization stage for a few days before it starts going into scheduled payments.

Investing with Lending Loop is safe, in the sense that it is properly regulated. Lending Loop is registered as an Exempt Market Dealer across the country. But of course once investors start making loans on the platform then all bets are off. So it’s up to individual investors to decide which companies they want to lend to.

First Impressions

Registering on the Lending Loop site as an investor is a pretty simple process. I filled in some online forms and provided some personal information such as my address and Social Insurance Number (for CRA purposes.) Then I answered an investor questionnaire to assess my personal preferences and risk tolerance. I obviously got the “very aggressive” result. 😀 The last thing I did was connect my TD bank account with Lending Loop using the information from my cheque book so I can transfer funds back and forth. The entire process takes about 1 to 2 weeks.

The overall site design is pretty clean and easy to navigate. The main dashboard page gives a broad overview of my account situation.

The Marketplace is where all the action is. 🙂 This is where investors can shop for the best loans. There are usually around 5 to 10 different loans looking for funding at any given time. The companies are listed in order of when they first appear on the marketplace. There’s a brief description about each business, and the nature of their loan.

Clicking on any individual loan will take you to the detailed page where you can see the company’s financial details, what the owner intends to use the loan for, and other Lending Loop investors who have already committed to investing in the loan. There’s even a Q&A section within this area where lenders can ask the borrower questions.

lending loop marketplace details

 

About the Loans 

The funding process begins with a loan application. Borrowers are required to be incorporated or a partnership for at least 1 year and have generated a minimum of $100,000 in annual revenue. Once this minimum criteria is met, Lending Loop’s credit assessment team performs a formal review of the loan application.

Lending Loop uses its proprietary evaluation and scoring system to assess a company’s creditworthiness. Factors in the credit evaluation may include:

  • A business credit score obtained from a credit rating agency, which may take into account payment and delinquency history, delinquency patterns, years in business, years borrowing, the business’ size, and industry segmentation, among others;
  • Various financial metrics such as the business’ debt service coverage ratio, debt-to-tangible net worth, and working capital ratio, among others;

Once a loan is approved it is added to the Marketplace and assigned a Lending Loop Credit Rating. This rating, consisting of a rating from A+ through E, is intended to quantify the level of risk associated with a particular listing and corresponds to an estimated loss rate for the loan. The higher the rating the lower the default risk. 🙂 Here is a look at the Lending Loop interest rates for each risk band.

lending loop risk band interest rate ranges

These interest rates are what the borrowers pay. Lenders are charged a servicing fee amounting to an annualized rate of 1.5% of the outstanding principal amount owed on a loan every time a monthly payment is made. For example, if a loan rated B has a posted interest rate of 11.5%, then investors can expect to actually receive 10% yield on their investment if all goes well.

All loans are amortized using the declining balance method over the term of the loan. So similar to a mortgage, the loan is paid back in monthly installments with principal and interest until the loan balance is gradually paid off. All Lending Loop interest rates for loans are fixed.

Small loans under $30,000 are usually funded very quickly, within a couple of days of being published on the marketplace. But larger deals worth $150,000 or more can take weeks to fund or sometimes fail to become fully funded so the loan doesn’t go through and committed investors get their money back.

Currently there aren’t any liquidity options as there is no secondary market, so lenders would be fully paid back only at the time of the last payment.

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