Virgin Money Social Lending – a New Revolution in the Debt Markets

On March 23, 2010, in Credit Cards and Debt, by Joshua Kennon

Virgin Money Social Lending

Virgin Money is creating a social lending system where family members and friends can create loan documents and lend or borrow to / from each other with Virgin standing in the middle. That way, things can't go south because if the borrower doesn't repay, it gets reported to the credit bureau and action is taking just like with a credit card or home loan!

First, I would never loan money to friends or family (with only a handful of exceptions*, one of which is my parents) under any circumstances. To me, money isn’t important – I just want to build and create like a little kid with a Lego set or a real-life version of Sim City. Other people, it seems, have this really big emotional investment in it. If I lend money, it takes away the chips I can use to build my playground. I’m going to want it back, even if I don’t need it, because it becomes about integrity. If someone were to not repay a loan, I wouldn’t be able to be around them because I would always think, “They don’t value our relationship enough to keep a promise.” Thus, it’s better to avoid the mess altogether.

To be perfectly honest, a big part of it has to do with the fact that I can earn better returns elsewhere and I would feel like an idiot loaning money at 10% if I know I can get 20% on some project Aaron and I are doing over on the side.  I mean, I try above all else to be rational.  Allocating capital to low returning investment such as debt isn’t prudent given my age and opportunity cost.

Virgin Money Social Lending Revolutionizes the Debt Markets

Virgin Money, however, has created a unique product that I find intriguing. You pay them a small fee of a few hundred dollars and they will structure a loan between you and a family member or friend. They service the loan, so that the borrower sends all of the payments into Virgin Money, who then tracks the loan balance, interest costs, sends statements, and forwards the money to you in the form of direct deposit. If the borrower doesn’t repay the loan, or is late, that gets reported to the credit bureaus just like any other debt and it could destroy their credit score and/or force them into bankruptcy. (more…)

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People Who Are Drowning in Student Loan Debt

On February 23, 2010, in Credit Cards and Debt, by Joshua Kennon

Victims of the Student Loan Industry or Irresponsible Borrowers?

Sallie Mae Master Promissory Note

The master promissory note from a typical Sallie Mae loan is ONLY TWO PAGES! I went through it and highlighted the sections that clearly spell out all of these "predatory" policies that "cheat" people out of their money. It's clear, in black and white, exactly what will happen if you don't make your payments. I'm sorry, but if you're too freakin' lazy to read two pages and you sign your name to the document without understanding it, how can anyone feel sorry for you (unless you had health problems because then you get a pass because you didn't do anything wrong)? You agreed to the terms and it explicitly explains how it will happen. You can click the image for the full-screen, highlighted version of the Sallie Mae Master Promissory Note. If you don't pay the balance, and interest is capitalized (added to the principal) so that you start to pay interest on interest, of course the balance can go from $25,000 to $300,000 over 20 years, just like an investment account can compound. It even says in plain English that they will apply any payments to the interest and penalties first before paying down your balance. If you didn't like those terms, WHY DID YOU TAKE THE MONEY?!

I was reading a site called Student Loan Justice as well as a piece at the Huffington Post where people are talking about their “overwhelming” student loan debt that is – wait for it – $15,000 or $30,000.  Basically, less than the value of a car.  Or a couple both of whom smoke a pack of cigarettes each day for five to ten years. Or 4 to 8 months of pre-tax income for the average American household.

Rational, full-grown legal adults who have the power to vote actually made a decision to borrow money, pay interest for the cost of “renting” that money, and then when it’s time to repay, want the government (read: everyone else, including you and me) to pony up the money because it’s cutting into their standard of living.  One guy on the site, not that long out of college, complains that he has a $1,250 per month payment and can’t live in New York City.  Then get the hell out of one of the most expensive cities in the world! I read a study a few weeks ago that showed New York was the single most difficult metropolitan area for a new college graduate to build wealth.  If you choose to take on a situation where the odds are against you, don’t complain when you don’t win.  Choosing your battles is the first and most important part of coming out ahead in life, just as it is in war or any other undertaking.

Maybe I’m not sympathetic because, as you know, both Aaron and I, as well as most of our friends, were first-generation college students that had to pay our own way through school (complete with a $140,000 price tag for each of us over four years). (more…)

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The American Express Plum Card Program

On February 12, 2010, in Credit Cards and Debt, by Joshua Kennon

How the American Express Plum Card Helped Revolutionize Mount Olympus Awards

American Express plum card

The American Express plum card lets you take a cash discount of 1% to 2% for early payment, or defer your balance for an additional billing cycle by paying only 10% of the statement balance. For those who are growing a business, the plum card can be a magnificent tool if handled responsibly.

A few days ago, I mentioned in The Importance of Frugality in Building Wealth that one of the ways we were able to save money was by using the American Express plum card at all of my businesses.  The new product offering by American Express, which is probably most famously known for its Black Centurion and Platinum Cards, is completely unique in the financial services industry.  For business owners, the plum card is a truly awesome way to handle accounts payable and cost of goods sold.

Here are the basics of how the American Express plum card program works:

  • Once your business is approved, if you spend more than a certain threshold (I believe it’s $5,000 or $10,000 per month), you qualify for 2% cash rebates for early payment on the account balance.  Anything below this is eligible for a 1% cash discount.  That is, if you charged $100,000 to your American Express plum card and paid the bill within a few days after the account statement closed, you would see a 2% cash discount on your next bill, or $2,000 in this case.  It would appear just as if you had made a payment by mailing in a check.  This money works as a reduction of your expenses, effectively earning you the opportunity to lower your cost on everything your business purchases.
  • You have another option for your American Express plum card balance: Instead of paying off the balance early and taking the cash discount, you can pay only 10% of the balance and defer the rest for another billing cycle.
  • You get access to the American Express OPEN forum for business owners, where you can connect with other business owners in the same situation, get advice based upon their experience, and share feedback about ideas.

The Two Ways Using the American Express Plum Card Can Drastically Improve Your Business

Managed well, the American Express Plum Card program can drastically improve your business in one of two ways depending upon if you want to maximize profits or cash flow: (more…)

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