What happened to personal accountability?

The $700 billion bailout package has raised a lot of eyebrows on Main Street. After all, isn't it Wall Street's fault for making all these risky investments that went bad? If so, why on earth would the government want to use taxpayer money to bail them out? Well, I've listened to a lot of radio commentary and read a whole host of opinons and articles on the topic and I am disheartened by one key thing that is missing in all of these pieces; where is the personal accountability in all of this?

Let me make this a bit more clear for you if you are having trouble following me. If you were walking down the street and a drug dealer popped out and offered you some drugs for free, would you take them? You know it's bad for you even if it is free. You know this decision is not likely to have a good outcome for you, but you decide to give it a shot anyway because everyone else is doing it and the dealer tells you it's good for you and you can handle it.

Is it the dealer's fault that you decided to take something you knew was bad for you? Now we all know that the dealer is a bad guy and should be punished for breaking the law and dealing drugs. But, aren't you also somehwat responsible for your bad choice? Shouldn't you shoulder some of the blame?

By now, you know where I am going with this. Sketchy mortgage brokers and slick Wall Street types told you that you could afford that $500,000 house even though you had not saved for your down payment and you only made $50,000 per year. After all, all your friends and neighbors were doing it, right? Even though it was available to you, you knew it did not make sense that you could get such a loan. But, you took it anyway. Then, when your house rose to $700,000 in value, another slick mortgage broker told you take take a second mortgage for $200,000 so you could put in a pool, go on that nice vacation and buy that expensive car. Or maybe you could just refinance your first mortgage and "Pick Your Payment" so that you could cover the new GIGANTIC mortgage (at least for 12-24 months until the payment adjusted). Hey, you deserve it and everyone else is doing it. Never mind that you couldn't affored the first mortgage payment much less the second mortgage payment.

Now that all of these loans are going bad (not really a shocker, by the way), banks and mortgage companies are going under and the securities issued to allow these silly loans are defaulting, people are trying to blame everyone but themselves. Greedy CEOs, lying mortgage brokers, etc. are the only ones to blame. It's not my fault that my payments are TWICE AS MUCH as my income!!

Why don't people start to take a little responsibility for their decisions and actions. Sure, there are plenty of cases of legitimate fraud, lying, cheating and stealing and the corporations that profited from all of this mess should also be severely punished. But, if that were the only problem, we would not be in this mess. The bottom line is that Americans have spent more than we make for over a decade now (think negative savings rate) and it is catching up to us. So, here is who I blame (in my opinion):

1) Individuals: if you are not diligent enough to read your own loan documents and understand them, then you probably shouldn't be taking on the debt required to buy a house, car, etc. While the small print is mind numbing for sure, the Truth in Lending Disclosure is actually pretty easy to read (shows the costs of the loan and your payments over time). If your paycheck was only $2,000 per month, you can't afford a $4,000 per month payment (now or 24 months from now)! It really is that simple! Spend less than you make (that's called saving, by the way) and don't get duped into believing it's OK to do otherwise.

2) Congress/Federal Reserve: The knuckleheads in Congress and the Fed have promoted easy money for so long now that we all believe we are entitled to it. When a number of Congressmen raised the issue that Fannie and Freddie might be a disaster in the making (in 2004 and 2005), most folks in Congress buried their heads in the sand. "We are meeting our housing objectives" (this is code for people that can't afford homes are getting loans for them - this is also known as "subprime" and the initial shoe to drop in this mess). Even Alan Greenspan (who shoulders a good chunk of the blame for his easy money and 1% interest rates) noted that Fannie and Freddie were a potential ticking time bomb. No one in DC listened and now they want to spend $700+ billion to try to fix the problem (I'm skeptical this will work, by the way).

3) Wall Street/Ratings Agencies: We were all convinced that the smart guys on Wall Street had invented a way to make risky borrowers less risky. Somehow, through financial alchemy, Lehman Brothers, Bear Stearns, UBS, etc. all convinced us that you could take a bunch of risky loans, wrap them up into a nice little bow, slap some insurance on them and call them AAA quality. Then, the ratings agencies, who were being paid to provide ratings on these securities (no conflict there), called them "Investment Grade" which allowed pension funds, retail investors and others to buy them up. As if that weren't bad enough, the investment banks et al decided to borrow 30 TIMES their equity capital to buy these toxic securities (for every $1 of capital they had, they would borrow $30 and buy these bad securities). When it came time to borrow more money as loans came do, the investment banks imploded.

So, what can we learn from all of this? First of all, people need to take responsibility for their own decisions and the consequences for those decisions. If you bought more house than you could afford, you have to live with the consequences of that decision. If you are spending more than you make on your credit cards, that too has a consequence for you. Just because you got a great 0% APR offer (think free drugs - see above) that doesn't mean it's a good decision to load that card up. I fear that the government bailout only reaffirms the dangerous and increasingly pervasive cultural phenomenon that individuals are not responsible for their own decisions. If there is always someone to bail you out when you make a bad choice, then is it really all that bad a choice to make in the future? The corollary to this is that good decisions are not rewarded, but rather penalized (think higher taxes). Until we return to the basic economic principals of freedom, individualism and true capitalism, I fear there is going to be a lot of economic pain in our great country.

Consumers Pile on $15 Billion More Debt in March 2008!

Americans are piling on the debt at an alarming pace while one of our most valuable assets (our homes) is plummeting in value. A recent article from Bloomberg points out that consumer debt levels increased by a whopping $15.3 billion in March 2008, which was substantially more than economists had projected. According to the article:

"Consumers are turning to credit cards after banks tightened standards for home-equity loans and other borrowing. The March figures brought U.S. consumer borrowing in the first quarter to $34 billion, the most since the first three months of 2001, when the economy entered its last official recession."

This is scary for those of you (like P2P-Loans.com) that are invested in Prosper loans. As banks turn away more people, they are likely to pursue alternative financing on sites like Prosper, LendingClub, etc..

America's debt problem has only gotten worse over the years and the current credit crisis may end up being a healthy event in that it will constrict American's ability to keep borrowing (at least for a short time). But, with the weak economy and fewer sources of capital, Prosper lenders beware...

Here's an interesting site that provides a lot of interesting debt-related information. Enjoy! http://mwhodges.home.att.net/nat-debt/debt-nat-a.htm

Save More, People! Why is the US savings rate so low?

Just the other day, the government quietly reported (only because the media didn't really give it any play - maybe it has something to do with their retailer advertisers) that the savings rate in the United States hit a new ALL TIME LOW! American's are saving a whopping $2 for every $1,000 of disposable income that they earn. TWO DOLLARS! That's a savings rate of about 0.2%. In no uncertain terms, America has become a spend and consume nation that relies on credit to finance our lavish lifestyles (a special thanks goes out to our kids for agreeing to pay back the $9+ trillion national debt for us). Well, in the spirit of returning back to our roots as a country of savers and investors (just look at the above chart to see that we did used to be a nation of savers), I'm offering a few tips and suggestions on how you might increase your savings rate just a tad:

1) Use your rebate check (thanks again to our kids who are paying for this) to pay down your credit cards - AND DON'T RUN THEM BACK UP. If you pay down $600 or $900 of your credit card debt that is probably costing you 20% in interest, you'll save as much as $200 per year in interest costs! It may even improve your credit score, which could lower your interest rate on other loans you have or need in the future! That'll help cover the increased cost of gas, at least.

2) Let your money work for you by putting your newfound savings in a money market account or a CD. For example, Countrywide is offering a FDIC insured 12-month CD at 4.10%. Of course, only do this if you can't use the cash to pay down your high interest rate credit cards (after all, 20% is much bigger than 4.10%). There are some other high yield ideas at P2P-Loans.com's High Interest site.

3) Refinance your credit card debt. If you have decent credit, why not seek out a low APR (or no APR) credit card to lower your borrowing cost. If you are paying a high credit card rate, take a look at some great credit card options on our Best Credit Card site. Using the 20% interest example, you could open a new account with a 0% APR for 12 months, transfer your balances to this new card (for a fee that is usually 3% up front) and save a whopping 17%! Here's a great offer from American Express that gives you 15 months of 0% APR on purchases and a 4.99% APR on balance transfers. There are a lot of other good offer out there as well. But, don't use this low rate as an excuse to spend more (this is key!). Stay disciplined! If you want to explore other great offers, use P2P-Loans.com's Credit Card Search to find other great offers.

4) Make saving automatic. There are a lot of programs that make saving easy. For example, open a Bank of America checking and savings account and sign up for their "Keep the Change" promotion. You not only get free checking and savings, but you also get $75 of free cash to kick-start your savings plan! Then, whenever you use your Bank of America debit card, they round your purchase up to the next dollar and put the change in your savings account. The interest rate on the savings account is lousy (less than 1%), but you will be saving some money with minimal pain and effort. If you make 30 purchases per month and save an average of $0.50 per purchase from this program, that's $15 per month and $180 per year. BoA will match 5% of that AND you get the $75 sign-up bonus, so that brings you to nearly $265 in savings (plus interest). It's an easy way to get started and it's automatic.

In summary, Americans are not saving enough and it's our responsibility to take care of our own futures. At the current deficit level, our government will not be in a position to bail us out when we run out of money, so SAVE MORE, PEOPLE! Please Digg it up!

Fellow Blogger Seeks P2P Loan on Prosper

P2P-Loans.com recently came accross the following listing on Prosper from a fellow blogger (Deepmarket.com) who is seeking a Prosper personal loan to consolidate some debt and begin the process of improving his finances. You can review his loan request for yourself on Prosper, but here is my quick and dirty analysis of this request:

1) The borrower has shown a strong desire to reduce his debt load, which was accumulated durning an entrepreneurial jaunt, and has returned to the "rat race" at a $100k+ salary. His company is a very strong one that focuses on government contract work (we all know that economic slowdowns don't hurt the government, so this job should be pretty safe). The borrower also provides some personal information about himself on his blog, which is comforting to a lender.

2) The borrower sought out the help of a Prosper expert, RateLadder, who is his group leader. RateLadder has been around Prosper for many moons and brings a lot of expertise to the table. While RateLadder doesn't personally know this borrower, his bid and endorsement does improve this listing on the margin.

3) Coverage - this borrower has just enough income to cover his monthly expenses with his salaried position. He also earns some extra cash through his blog (anywhere from $60 per month to $900 per month according to his listing). This income should be available to support any unexpected expenses as well as provide capital to repay revolving debt more quickly. Based on my math, this borrower should be able to cover the new Prosper payment with his salary alone and the blog income will provide a small cushion.

4) $25,000 request - this is a large loan amount to repay fully in a short 3 years (the term of a Prosper personal loan). With an interest rate of 25.45%, that equates to a $1,000 per month payment, which is large. Any bump in the road means that this borrower may choose not to repay this loan (in my experience, borrowers do not make partial payments, but rather stop paying entirely). Lenders can take some comfort in the fact that this borrower has a "public" personality via his blog, thus the public shaming he'd take by being late could be a nice incentive for him to make this loan his #1 priority.

So, what's the sum total of my analysis? The borrower is clearly an intelligent person with a great job in a high-demand area (e.g. if he does lose his job, his skills are in high demand). While the leverage is high, the risk of default of mitigated by the high interest rate being offered (25%+ at the start, but this could get bid down through the course of the auction). As part of a diversified Prosper portfolio, P2P-Loans.com does believe this is a loan worth bidding on and I will support it with a small bid once funds clear my Prosper account. If you are new to Prosper, you can get $25 of free cash for joining Prosper and winning a $50 bid on this loan. That makes it a no-brainer in my opinion.

Free Software & Other Stuff - No Need To Pay Anymore (PhotoShop, Google, Tax Prep, Coupons and More)!

There is nothing like free to get my blood flowing. There is a reason that this single word is one of the highest cost words on Google AdWords since I don't know of anyone in this world that doesn't like free stuff. So, I thought I would try to summarize some of the coolest free stuff I've found on the web (mostly software, but there is tons of free stuff that everyone should know about). Please feel free to add cool, free stuff you've found in the comments section.

Free PhotoShop Software
Adobe USA (the parent company of Photoshop) just announced a free version of its famous Photoshop software online, Photoshop Express! I've used Photoshop for years and can tell you it is a truly excellent program. In fact, they are also throwing in 2GB of free online storage so you can upload your pictures and use the free software.

Google Apps
It seems like Google is adding something new to its free online applications on a daily basis. Google offers some of the coolest applications on the web. From the more boring stuff like Google Docs and Spreadsheets to really cool stuff like Google Picasa, Google SketchUp (really cool 3D software), and, of course, the best of all, Google Earth (WARNING, if you download Google Earth, I can promise you endless hours of lost productivity).

Free Tax Prep Software
I wrote about this in an earlier blog post, but wanted to touch on it again since we are rapidly approaching the dreaded April 15th. Why pay for this service when you can get it for free (if you meet certain income levels). If you can't get it for free because of your income, check out the tons of low cost online options (that's what I use). P2P-Loans.com has also created a quick and dirty webpage to give you a few good options on the Tax Prep software side of things.

Coupons (online and offline)
You have to be careful when searching the billions of free coupon sites on the web because it's very easy to get lost. But, never buy anything online without a coupon. It's as simple as searching Google for "Name of Store/website Here" + "coupon code". For example, I recently bought something at Dick's Sports at their local store. I found a great printable $10 off any $25 purchase coupon. I've used this coupon 10 times already saving me $100 in total! I bought my wife a present from Nordstrom's the other day (online) and saved 25%! This is free money, people, so don't miss out. It only takes 2 minutes to find a legit coupon.

Other: Endless Hours of Searching for Free Stuff
There is no shortage of websites that offer free stuff, so I would encourage you to search for this stuff online (Click Here to get started). I've actually found some pretty neat things online, so I would encourage you to check it out. Good luck, happy hunting and thanks for checking us out.

Help, My Credit Score Just Fell Off A Cliff (and I didn't even do anything)!

As you may not know, Fair Isaac (what's so fair about them, I don't know) recently updated its FICO score formula and it is being rolled out by the three primary credit agencies. While there are many views on whether these changes are good or bad, the one certainty about all of this is that your credit score is probably going to change. Here's our quick and dirty on how this might affect you:

If your credit is currently being bolstered because you are an authorized user on your parents credit card account, you are probably going to get HAMMERED! One of the largest (and most negative) changes to the formula is the removal of the benefit you get from being on someone elses account as an authorized user. Some credit analysts belive as many of 25% of all Americans with credit could be negatively affected by this one change (that's about 40 million people whose credit score could fall). The good news is that it may take a number of months before all the credit card companies, banks, etc. begin to use this new score (so, get some new credit while you can - P2P-Loans.com has some great credit card offers if you are interested). Getting credit now (while you can still piggyback with daddy's good credit) will allow you to start building your own on-time credit file.

However, there are some positive changes to the scoring methodology as well. For example, the system treats a single large slip up (even as much as 90 days) as an “isolated delinquency” to individuals with a 10-year credit history. Routine late payments of less than 90 days will still damage your report but at least now a legitimate mistake won’t haunt you so severely.

Also under the new system, multiple credit inquiries in a short period of time won’t be so damaging to your credit score, as now they will be weighted less heavily in calculating the overall number.

Finally, the new system rewards borrowers who demonstrate the ability to stay on top of both revolving debt (credit cards, home equity lines of credit) and installment loans (Prosper Loans, student, auto or boat loans, mortgages). Even if you show a wide range of loans but a solid history of paying them on time, expect your score to jump up as well. Go figure, if you pay on time, you have a good score!

Just as a helpful refresher, here is what we do know about the FICO system (even though the exact numbers are closely guarded by Fair Isaac) and what the rough weighting is for certain types of credit data used:

- 35% — punctuality of payment in the past (only includes payments later than 30 days past due)
- 30% — the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
- 15% — length of credit history
- 10% — types of credit used (installment, revolving, consumer finance)
- 10% — recent search for credit and/or amount of credit obtained recently

P2P Lending Grows in Popularity as Banks Slow Lending (Are Individual Lenders Suckers or Savvy?)

By now, you've certainly read about the credit crunch that has engulfed the world. Banks are running low on cash to lend and in some cases (such as Citigroup) our largest banks are dancing dangerously close to the fire having to rely on sovereign investment funds (can you say Saudi Arabia) to bail them out. But, with consumer and small business loans scarce, credit card companies reducing or canceling credit lines and banks refusing to write new home equity loans, what's a small business to do?

A recent Wall Street Journal article (see below) talks about how small business owners are turning to P2P Lending sites (such as Prosper, LendingClub, Virgin Money and Zopa to name a few) for capital. But, for lenders on Prosper, are we the suckers or the savvy investors by making these loans? The banks are likely turning away some pretty good credits and borrowers on P2P sites tend to pay a higher interest rate relative to a more traditional small business bank loan that might be backed by assets in the business or a personal guarantee by the business owner. At the same time, delinquency rates are very high at Prosper (upwards of 20%+ of funded loans in some months - visit LendingStats or Eric's Credit Community for details).

I published a blog posting on January 22, 2008, which summarizes my personal experience as a Prosper lender. My firm hope is that Prosper and the other P2P Lending sites will continue to be a good place to invest; however, the jury is still out on this one. P2P-Loans' future is counting on it!

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Where Either a Borrower Or a Lender Can Be Small-Business Owners Turn To Online Networks for Funds As Banks Tighten Credit
By JANE J. KIM

When Jeff Walsh wanted to refinance the small-business loan on his coin laundry, he didn't want to take a chance that his bank would reject his application. "I just bought a house in 2007 and was a little nervous about what the bank would say about my debt-to-income ratio."

Instead, the 31-year-old from Schaumburg, Ill., recently borrowed $22,500 on Prosper.com, an online lending network that matches individual borrowers and lenders. The interest rate on Mr. Walsh's loan: 10.25% -- several percentage points below what he says he would have had to pay at a bank.

HIGH FINANCE FOR THE MASSES

Read a Q&A with the founder of Prosper.com. As the credit crisis spurs traditional lenders to tighten credit standards and raise fees, more small-business owners and entrepreneurs are turning to so-called person-to-person lending networks -- with names like Prosper, LendingClub.com and Zopa.com -- to help keep their businesses going. The unsecured loans are tiny, usually no more than $25,000. But borrowers say they are able to get loans more quickly and with less paperwork than at a bank. And people with good credit are able to lock in lower rates -- often 8% to 12% -- than they would otherwise have to pay on credit cards or unsecured bank loans.

INDEPENDENT STREET BLOG

Have you used peer-to-peer lending? Read the latest post, and share your thoughts. Person-to-person lending is a small but fast-growing corner of the Web economy. New sites are jumping in, including Virgin Money USA, majority-owned by Sir Richard Branson's Virgin Group PLC. Roughly $100 million in new P-to-P loans was issued in the U.S. last year, a number that is expected to jump tenfold by 2010, according to Online Banking Report. Recently, some larger financial institutions have begun to take notice of P-to-P lending...

(article continued at WSJ.com)

$100 OIL! How to Cope With $3+ Per Gallon Gas Prices

Wow, oil prices continue to soar and there is not much we average consumers can do about it. I used to spend $30 every week to fill my car up and now it's running me more like $50 each time (that's over $80 more per month and about $1,300 per year!). I don't know about you, but this is taking a serious dent out of my pocketbook and I don't like it. Well, there are lots of ways you can help reduce the impact high gas prices on your wallet.

For example, I recently signed up for the Chase PerfectCard (APPLY NOW), which offers 6% cash back on ALL GAS PURCHASES for the first 3 months and then 3% cash back thereafter (that's nearly $0.20 per gallon). For me, that's nearly $60 in free gas every year (and it is free since there is no annual fee). As a bonus, you 1% cash back on ALL OTHER Purchases and a 0% APR for 6 months as well.

In addition to financial tools like the one above (it's first on the list since it's the easiest one to do, by far), here are some tips for reducing the impact of high gas prices on your wallet:

Observe the Speed Limit: In addition to avoiding a nasty speeding ticket and the risk of getting into an accident, driving the speed limite can also save you big bucks on gas. As a general rule, for every 5 MPH you drive over 60 MPH, it is costing you about $0.20 per gallon! If you have a lead foot like me, it could save you $0.50 or more per gallon.

Don't Drive Aggressively: While it might make you feel good to stomp on the gas pedal to fly by the one car ahead of you in town or on the Interstate, it won't really get you to your distination all that much faster, but it will cost you a pretty penny. Lots of accelerating, speeding, and braking will cost you BIG MONEY when it comes time to fill up. One estimate puts the increased cost at up to 33% (or more than $1.00 per gallon!). Since most of us are not THAT crazy on the road, the cost is more likely $0.25 per gallon, but that adds up, trust me.

Maintain Your Car: Keeping your tires properly inflated, changing your air filter regularly and using the right grade of motor oil can save you over $0.20 per gallon. These are things you should be doing anyway as they will extend the life of your tires and your car thereby saving you a ton of money anyway.

I know this stuff can be kind of boring, but by signing up for the Chase PerfectCard (Click here to APPLY NOW), observing the speed limit, driving more carefully, and maintaining your car, you can reduce your gas bill by over $0.85 per gallon or over $350 per year (much more for you power drivers out there).

Of course, you could always buy a Prius...

Credit Card Delinquincies SOAR! Prosper Loans to Follow?

A recent report published by CardTrack.com shows that consumer credit card delinquencies have soared in the last few months. According to the report, delinquincies have reached 5.4%, up from 4.5% just 1 year ago. Not surprisingly, total credit card debt has increased a qhopping 315% since 1989 with the Federal Reserve estimating total consumer revolving debt of over $2.5 trillion (that's with a "T").

So, what does this mean to your Prosper loans? Well, naturally, I would fully expect to see DQs accelerate in the coming months. Of course, for those lenders that have been paying attention, this is on top of the already very high DQ rates on Prosper. For example, about 5.2% of 12-month old AA loans (the best Prime loans you can make on Prosper) are late on Prosper (this is nearly equal to all credit card DQs!). If you ventured into the A-rated loan category, nearly 10% of these loans are late (again, only loans that are 12 months old as of this post). B, C and D-rated loans get even worse at 13.4%, 20.7% and 23.3%, respectively.

One can only hope that Prosper will start performing more like the credit cards, which post a meager 5.4% DQ rate as of February 2008. Be well and visit us often.