Participants in 401(k) plans are often reminded that they can "become their own bankers" because one of the investment choices in a retirement plan is a loan back to the employee participant. You pay interest on the loan, but every dime is credited back to your own account.
It's just another 401(k) asset that happens to earn a guaranteed 5 percent to 6 percent these days. Financial institutions selling assets in the plans they administer are driven nuts by the loan feature they are forced to offer, because it cuts in to their bottom line, but it's a good deal for the 401(k) holder.
Just around the corner is yet another do-it-yourself financial product that will test the age-old business model of the banking industry. At www.lendingclub.com, investors can interact directly with borrowers to do an end run around the banking industry's traditional role as middle men. The net result for borrowers is an interest cost of about 10 percent for an unsecured loan. The average rate of return for lenders is around 9 percent.
The way the system works is that potential borrowers go online and provide lendingclub.com with information to get pre-approved for a loan. More than 90 percent of applicants are turned down.
On the flip side, investors are provided with a list of potential borrowers and can choose one (or possibly several) to whom they will be willing to provide the requested loan proceeds.
I first heard about Lending Club about six months ago from some friends who had been investing successfully in these individual loans for more than a year. They had been selecting loans to borrowers with lower credit ratings and as a result, had been earning in excess of 10 percent. None of their loans had defaulted.
I had written this off as being just another high-risk investment category along the lines of second mortgages that had gotten so many people in trouble over the past five years. However, what got my attention in this case was reading recently that Lawrence Summers, the former Treasury secretary, had recently joined the board of Lending Club. The company has funded more than $2 billion of loans since its inception in 2007 and has been growing exponentially. It is planning an IPO for sometime next year.
Obviously this isn't an investment for everybody, but for those who want to flirt with the cutting edge of a new investment model, a toe in the water might be a worthwhile. Earning 10 to 15 percent on even a small portion of the fixed-income investments in your portfolio can have a material effect on overall returns when the rest are earning just 3 percent or less. There's nothing to lose by at least checking it out.
Moreover, there's a side of me that wouldn't be unhappy to see the too-big-to-fail financial institutions driven into the dustbin of history by a populist end-run made possible by ever-evolving technology. Lending Club might just be the beginning.