Peer to Peer Lending Small notes Vs Large Notes
"I started with lending club about a year ago.  I love it.  It has been insightful.  Off topic, but I am in a loan to a guy who make 120K a year and is regularly late and has a pretty high interest rate.  Crazy. You gain some economies of scale by going with a bigger note.  I have $100 notes that I get hit for 2 or 3 cents for a fee, where $25 notes are always a penny.  However, I don't think that should be your deciding factor. I scale my note purchases based on how much I like the status of the borrower.  For example, I did $100 (which is currently my max) for a guy with a reasonable loan amount 16K, a stable work history (15+ years), a great credit history, and a great interest rate (16.9%).  If one of those things were a bit out of ""whack"".  I might go $50, two $25.   I prefer 36 month notes, really 5 years to get out of debt?  It is unlikely to happen IMHO. Keep in mind that if you invest $100 in a loan, then you get one $100 note.  You can't break them up into 4 $25 notes.  For that reason, if you are likely to want to sell the note prematurely, keep it at $25.  The market is greater.   I've had a lot of success using the trading account, buying further discounted notes for people who want out of lending club, or get spooked by a couple of late payments and a change in billing date.   Another advantage of using the trading account is you start earning interest day 1.  I've had new notes take a couple of weeks to go through.   To summarize: There are some other things, but that is the main stuff I look at."
"Probably the most significant difference is the Damocles Sword hanging over your head, the Margin Call. In a nutshell, the lender (your broker) is going to require you to have a certain amount of assets in your account relative to your outstanding loan balance. The minimum ratio of liquid funds in the account to the loan is regulated in the US at 50% for the initial margin and 25% for maintenance margins. So here's where it gets sticky. If this ratio gets on the wrong side of the limits, the broker will force you to either add more assets/cash to your account t or immediately liquidate some of your holdings to remedy the situation. Assuming you don't have any/enough cash to fix the problem it can effectively force you to sell while your investments are in the tank and lock in a big loss. In fact, most margin agreements give the brokerage the right to sell your investments without your express consent in these situations. In this situation you might not even have the chance to pick which stock they sell. Source: Investopedia article, ""The Dreaded Margin Call"" Here's an example from the article: Let's say you   purchase $20,000 worth of securities   by borrowing $10,000 from your   brokerage and paying $10,000 yourself.   If the market value of the securities   drops to $15,000, the equity in your   account falls to $5,000 ($15,000 -   $10,000 = $5,000). Assuming a   maintenance requirement of 25%, you   must have $3,750 in equity in your   account (25% of $15,000 = $3,750).   Thus, you're fine in this situation as   the $5,000 worth of equity in your   account is greater than the   maintenance margin of $3,750. But   let's assume the maintenance   requirement of your brokerage is 40%   instead of 25%. In this case, your   equity of $5,000 is less than the   maintenance margin of $6,000 (40% of   $15,000 = $6,000). As a result, the   brokerage may issue you a margin call. Read more: http://www.investopedia.com/university/margin/margin2.asp#ixzz1RUitwcYg" Technically it's an asset - a note you hold and your friend promised to repay you. I don't know much about paypal or bitcoin, but I can provide a little information on BTC(Paypal I thought was just a service for moving real currency).  BTC has an exchange, in which the price of a bitcoin goes up and down. You can invest in to it much like you would invest in the stock market. You can also invest in equipment to mine bitcoins, if you feel like that is worthwhile. It takes quite a bit of research and quite a bit of knowledge. If you are looking to provide loans with interest, I would look into P2P lending. Depending on where you live, you can buy portions of loans, and receive monthly payments with the similiar risk that credit card companies take on(Unsecured debt that can be cleared in bankruptcy). I've thrown a small investment into P2P lending and it has had average returns, although I don't feel like my investment strategy was optimal(took on too many high risk notes, a large portion of which defaulted). I've been doing it for about 8 months, and I've seen an APY of roughly 9%, which again I think is sub-optimal. I think with better investment strategy you could see closer to 12-15%, which could swing heavily with economic downturn. It's hard to say. Echoing the others, never lend money to a friend or family member, just give it to them.   If you must have a contract in place then consider it a pay it forward type contract where the friend simply gives the same amount to someone in need at a future date.   The value of the friendship can never be measured, but it surely will be diminished by the amount of the loan between the two of you. Smaller markets can actually be more volatile so it's not a good idea to lower Graham's criteria for them. The only real adjustment possible is inflation adjustment. $100 million in 1973 United States works out to $500 million today based on the difference in CPI/Inflation from 1973. This number will be different for other markets where the rate of inflation since 1973 has been different. So the real question to ask is - what is to $100 million in the United States in 1973 worth today in your market? Source: http://www.serenitystocks.com/how-build-complete-benjamin-graham-portfolio Stocks, Bonds, Bills, and Lottery Tickets notes the work of Fama and French who researched the idea of a small-cap premium along with a value premium that may be useful to note in terms of what has outperformed if one looks from 1926 to present. Slice and dice would also be another article about an approach that over weights the small-cap and value sides of things if you want another resource here. Sorry, but I am absolutely correct.  Fractional reserve lending (banking) is simply that when someone deposits money into a bank, the bank is allowed to loan that money out, so long as they keep a reserve.  If the reserve rate is 10% (it's much lower in reality), and someone deposits $100 into the bank, the bank can then loan out $90.  That is fractional reserve lending at its most basics.  Now fractional reserve lending does have a multiplier effect.  And this effect is exactly how I described it.  Let's go back to the example.  Person A deposits the $100, the bank then loans $90 to person B, person B spends it with person C, person C takes the money and deposits back to the bank.  Now the bank has the $100 cash back, $90 in loans and the $190 in deposits, so they need to hold onto $19 as a reserve and can loan out $81.  Assuming the money cycles with 100% efficiency, the bank can continue loaning out the same money until they are left with $1000 in deposits, $900 in loans, and the original $100 is the reserve.  This is the multiplier effect. "I figured that there must be some people in a corporate office somewhere who sign $100M loans for lunch. :)  The banks have that experience (but I'm not interested in asking them for a sample), and our consultants definitely have that experience, but I'm looking to evaluate the consultants with this exercise. If they provide the sample, then deliver to that sample, I'm still blind as to whether that sample is ""good"" as compared to something that the corporate world would use on the daily.  I'd take your advice for the $1M loan, but I can't help but think as the factors of 10 increase, the data required to properly negotiate also increases. I don't want to go in blind, and provide a proposal that looks like a high school project." "You are confining the way you and the other co-founders are paid for guaranteeing the loan to capital shares. Trying to determine payments by equity distribution is hard. It is a practice that many small companies particularly the ones in their initial stage fall into. I always advise against trying to make payments with equity, weather it is for unpaid salary or for guaranteeing a loan such as your case. Instead of thinking about a super sophisticated algorithm to distribute the new shares between the cofounders and the new investors, given a set of constraints, which will most probably fail to make the satisfactory split, you should simply view the co-founders as debt lenders for the company and the shareholders as a capital contributor.  If the co-founders are treated as debt lenders, it will be much easier to determine the risk compensation for guaranteeing the loan because it is now assessed in monetary units and this compensation is equal to the risk premium you see fit ""taking into consideration the probability of default "". On the other hand, capital contributors will gain capital shares as a percentage of the total value of the company after adding SBA loan." "I experimented with Lending Club, lending a small amount of money in early 2008. (Nice timing right - the recession was December 2007 to June 2009.) I have a few loans still outstanding, but most have prepaid or defaulted by now. I did not reinvest as payments came in. Based on my experience, one ""catch"" is lack of liquidity. It's like buying individual bonds rather than a mutual fund. Your money is NOT just tied up for the 3-year loan term, because to get good returns you have to keep reinvesting as people pay off their loans. So you always have some just-reinvested money with the full 3 year term left, and that's how long it would take to get all your money back out. You can't just cash out when you feel like it. They have a trading platform (which I did not try out) if you want your money sooner, but I would guess the spreads are wide and you have to take a hit when you sell loans. Again though I did not try the trading platform. On the upside, the yields did seem fine. I got 19 eventual defaults from 81 loans, but many of the borrowers made a number of payments before defaulting so only part of the money was lost. The lower credit ratings default more often obviously, only one of 19 defaults had the top credit score. (I tried investing across a range of credit ratings.) The interest rates appear to cover the risk of default, at least on average. You can of course have varying luck.  I made only a slight profit over the 3 years, but I did not reinvest after the first couple months, and it was during a recession. So the claimed yields look plausible to me if you reinvest. They do get people's credit scores, report nonpayment on people's credit reports, and even send people to collections. Seems like borrowers have a reason to pay the bill. In 2008 I think this was a difference compared to the other peer lending sites, but I don't know if that's still true. Anyway, for what it's worth the site seemed to work fine and ""as advertised"" for me. I probably will not invest more money there for a couple reasons: However as best I could tell from my experiment, it is a perfectly reasonable place to put a portion of your portfolio you might otherwise invest in something like high-yield bonds or some other sub-investment-grade fixed income. Update: here's a useful NY Times article: http://www.nytimes.com/2011/02/05/your-money/05money.html" From Dimson, Elroy, Paul Marsh, and Mike Staunton. Triumph of the Optimists: 101 Years of Global Investment Returns. Princeton, N.J: Princeton University Press, 2002: Disappointingly, the small firm effect has not proved the road to   great riches since soon after its discovery, the US size premium went   into reverse. This was repeated in the United Kingdom and virtually   all other markets around the world. Despite their disappointing performance in recent years, the very   long-run record of small-caps remains one of outperformance in both   the United States and the United Kingdom. Furthermore, mid- and   small-size companies are still an important asset class. Their   differential performance over long periods of history shows that there   is useful scope for investors to reduce risk by diversifying across   the “large” and the “small” capitalization sectors of the market.   Furthermore, given the pervasiveness of the size effect across the   entire size spectrum, it is important to all investors since the   size tilt of any portfolio will strongly influence its short- and   long-run performance. This holds true whether there is a size premium   or a size discount. The size effect has certainly proved persistent   and robust. What is at issue is whether we should continue to expect a   size premium over the longer haul. And accompanying charts:    And one chart from BlackRock: I think this is off topic, but here is a stab: So these are cashless.  It could be a way to smooth out the harsh reality of capitalism (I overproduced my product, I have more capacity than I can sell) and I can trade those good to other capitalists who similarly poorly planned production or capacity. Therefore the market for a system like is limited to businesses that do not plan well.  Business that plan production or capacity to levels they can already sell for cash do not need a private system to offload goods. Alternatives to such a system include: (I don't know how many businesses are really in this over production / over capacity state.  If my assumption that it isn't many is wrong, my answer is garbage.) This is a bartering system with a brokerage.  I think we have historically found that common currencies create more trade and economic activity because the value of the note in your pocket, which is the same type of note in my pocket, is common and understood.  Exchange rates typically slow down trade.  (There are many other reasons to have different currency or notes on a global sale, but the exchange certainly is a hurdle to clear.) This brokerage is essentially adding a new currency (in a grand metaphor).  And that new currency is only spendable on their brokerage, which is of limited use to society as a whole, assuming that society as a whole isn't a participating member of that brokerage. I can't really think of why this type of exchange is better than the current system we have now.  I wouldn't invest in this as a business, or invest in this as a person looking for opportunity. Large businesses are, in every model, considered to be less likely to default, and Lehman brothers etc notwithstanding, this is historically correct.    However, this is still stupid, since the diversification of lending money to many small businesses is way better.  This, in turn, is not mapped properly by the regulations on reserve capital.    Tl;dr:  Banks get punished by regulations if they lend money to small institutions instead of large ones. "Oftentimes, the lender (the owner of the security) is not explicitly involved in the lending transaction. Let's say the broker is holding a long-term position of 1MM shares from Client A. It is common for Client A's agreement with Broker A to include a clause that allows the broker to lend out the 1MM shares for its own profit (""rehypothecation""). Client A may be compensated for this in some form (e.g. baked into their financing rates), but they do not receive any compensation that is directly tied to lending activities. You also have securities lending agents that lend securities for an explicit fee. For example, the borrower's broker may not have sufficient inventory, in which case they would need to find a third-party lending agent. This happens both on-demand as well as for a fixed-terms (typically a large basket of securities). SLB (securities lending and borrowing) is a business in its own right.  I'm not sure I follow your follow-up question but oftentimes there is no restriction that prevents the broker from lending out shares ""for a very short time"". Unless there is a transaction-based fee though, the number of times you lend shares does not affect ""pocketing the interest"" since interest accrues as a function of time." "I'm hopeful that opinion based answers are acceptable in this context. I've been using YNAB classic for some years. I've tried to keep all possible options open in the manner of individual items for budget allocation. There does seem to be a number of ""emergency"" situations for which one would prefer to not dig into regular scheduled expenses. Having a large number of smaller funds give you flexibility in terms of categorizing your past emergencies. This gives you a better view of future allocation of your funds, perhaps freeing up money you might not have otherwise identified. If you are using a program such as YNAB (classic, I'm not familiar with the current version), you can easily transfer funds from one category to another as needed. After all, it's merely numbers in a file, not ""real money"" that would be otherwise inaccessible. To summarize, I think the smaller fund concept provides a better picture. The big picture of the small stuff means greater flexibility and forecasting. Prior to the world of personal computers, I had a piece of paper in my wallet. It had every category I could devise, representing every penny in my checking account. Pencils and erasers eventually grew into YNAB, but the concept remained the same all these decades."