An analysis of the returns and risks of different lending platform options including asset-based lending, unsecured peer-to-peer lending, cryptocurrency lending, and a cash advance company that promises to pay a 15% annual percentage yield.
Topics covered include
- U-haul Investors Club and other asset-based lending options
- DriverLoan Investor Club that promises a 15% guaranteed return
- BlockFi – cryptocurrency lending with yields over 8%
- LendingClub and why returns are only 4% to 5%
- The economics of cash advance and payday loan lending businesses
Online Payday and Installment Loans: Who Uses Them and Why? A Demand-Side Analysis from Linked Administrative, Survey, and Qualitative Interview Data by, Stephen Nuñez, Kelsey Schaberg, Richard Hendra, Lisa Servon, Mina Addo, and Andrea Mapillero-Colomina
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Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 304. It’s titled, “A 15% Guaranteed Return? Lending on the Fringes of Finance.”
DriverLoan Investors Club
Last month I got an email from Victoria. She wrote that she is a recruiter at DriverLoan USA. They are a cash advance company that has been in operation since 2018. She wrote, “We have helped a lot of people and now we want to help more. That’s why we recently launched our new financial product service named DriverLoan Investors Club where we offer a 15% APY guaranteed, with a minimum of $50 to open an account. The platform is designed to protect us by anticipating the inflation that we are going to experience in the United States.
“Looking at your savvy financial profile, I think you could fit perfectly to review our product. We invite you to go to our website. Look forward to hearing from you. All the best, Victoria.”
I looked at the email. They had a very well designed logo. Their email marketing software was HubSpot, which means they’re paying at least several hundred dollars a month, instead of a free Mailchimp account. But I filed it away and I forgot about it.
Then last week I got another email with the heading: “We are Officially BBB Accredited.” My initial response was, that’s not very high. I thought that was their bond rating. But no, as I read the email later it said, “We’re pleased to announce that DriverLoan USA is nationally accredited by the Better Business Bureau with an A ranking. Our BBB rating gives our clients assurance that we are accredited by an established non-profit and non-biased standard. It means that clients can rest assured that we are following responsible, honest practices.”
Fifteen percent guaranteed returns. I decided to take a look at it because when I went on their website, it actually was a very polished site. In my book where I outline a 10 question investing decision framework, one of the questions is “who is on the other side of the trade?” Who is the counterparty and what does it take to be successful with a particular investment. So I want to understand the model and who these firms are. How can they guarantee 15%?
U-Haul Investors Club
Another reason I wanted to take a look at it is it reminded me of the U-Haul Investors Club, which I had also never heard of and discussed back in episode 133 in November 2016. I thought that was kind of a strange name. You don’t think of investing with U-Haul. They offer secured notes. the parent of U-Haul, Americo, which owns U-Haul, they own a real estate company, Republican Western Insurance Company, and Oxford Life Insurance Company.
And they have over $150 million of U-notes that they issued. The current one that expires today is a 2.5%, 2-year note, secured by furniture pads and furniture dollies. It’s full recourse, which means if they default on the note and the furniture pads aren’t enough to pay back the lenders, then you have access to the company’s other assets. There’s a big difference between 2.5% secured and 15% guaranteed.
On the DriverLoan Investors Club website, it says there’s no annual fee, “no annual maintenance or commission fees… Start investing with as little as $50. We stay away from stocks and risky portfolios. You can cash out at any time.” And you obtain a certificate of investment after signing up. Also on the home page, they showed the performance of their 15% guaranteed plan relative to other peer-to-peer lending options, Prosper, LendingClub, as well as a couple banks such as Bank of America.
We looked at peer-to-peer lending last time back in episode 216, about 2 years ago. And I said I was done participating. And I had been investing in peer-to-peer lending since 2006 with Prosper. And started with Lending Club back in 2014. My returns on my LendingClub portfolio were over 7%. My Upstart period peer lending portfolio did worse, less than 4%.
But I was concerned 2 years ago about the returns for these portfolios were dropping. LendingClub and Upstart were not increasing the interest rates as defaults increased because they had found that they could securitize these loans, package them up, over-collateralize them. Which means they might put $12 million of loans backing a $10 million security. So the institutional investors invested in these securities would have some protection.
LendingClub’s 2015 vintage year returns, so all the loans they issued in 2015, had a return of 4.74%. And the average interest rate was 12.94%. Defaults cost about 8 percentage points. They have since actually raised their loan rates. So in 2016, C-rated loans, the interest rate was 13.84%. If you borrow it on LendingClub Today, the 2020 loans, C-rated, 16.04%.
Returns have been 4–5%, which kind of gives you an idea. We can get 2.5% with U-Haul, 4.5% with Lending Club. How is it we could get 15% with the DriverLoan Investors Club?
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