Motley Fool: a technological stock and a bank, in one

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LendingClub (NYSE: LC) bills itself as “America’s largest online marketplace connecting borrowers and investors” – and it’s about to encompass more. The company has been approved to acquire Boston-based digital bank Radius Bank – and with it its banking charter, making the Lending Club a bank. The acquisition will significantly reduce LendingClub’s costs, as it can fund loans with cash from Radius customers’ deposits instead of borrowing money at high interest rates.

Inflation fears recently led to a big sell off in fast-growing tech stocks. However, bank stocks often do better with inflation and rising interest rates. If inflation ends up causing the Federal Reserve to raise interest rates, LendingClub would likely be able to charge a higher rate on new loans. Management even estimated that if the Fed sharply increased its fed funds rate by 2%, net interest income would increase by 13.3% over the next year, as of March 31. In other words, inflation and higher rates aren’t that bad for the company like they are for pure tech stocks.

LendingClub is currently expected to record a significant loss this year, but this is mainly due to one-time and one-time costs when transitioning to a new business model. Meanwhile, it’s growing, with first quarter revenue increasing 40% from the previous quarter and loan origination 63%. Take a closer look at LendingClub.

Ask the fool

Question: What is a yield curve? – SF, Maryville, Tennessee

A: Imagine a simple graph that plots the current interest rates on US Treasury bonds with terms of three months, five years, 10 years, 20 years, and 30 years. Connect all of these points, and you will have a yield curve.

In typical years, shorter-term bonds will have lower interest rates, and vice versa. So a “normal” yield curve will be a line that starts near the lower left corner of the chart and slopes upward, slowly leveling off. It reflects investors’ assumptions that the economy will continue to grow.

Other yield curves, such as flattened or inverted curves, suggest expectations of a slowing economy or lower interest rates.

Question: Can you explain “the forced sale”? – CC, Sioux City, Iowa

A: The term applies in multiple situations. For example, if you invested in stocks “on margin” (with money borrowed from your brokerage house), you might receive a “margin call” if the value of your holdings goes down. You would be forced to add money to your account, which a lot of people do by selling stocks. If you don’t take action, your brokerage firm might just sell some of your stock for you.

Another type of hard sell can happen with a mutual fund. If shareholders are concerned about the fund’s performance, they may sell enough shares that the fund is forced to sell many of its investments in order to generate cash to cover withdrawals. If many funds sell stocks, it can drive down the overall stock price and lead to more withdrawals, which leads to more forced sales. Ironically, fund managers can end up doing what they would least like to do during a market downturn: sell stocks instead of buying more stocks of cheaper stocks.

My dumbest investment

My dumbest investment was buying my first home. I did everything wrong. – CC, online

The madman replies: There are a lot of mistakes you can make when buying a home, and each one can cost you money – potentially a lot.

For starters, don’t shop around or buy more homes than you can safely afford – if your household experiences a job loss or health problem, it could lead to foreclosure.

Many people don’t look for the best interest rate or choose the type of loan that’s best for them; when interest rates are low, for example, you can lock in a 30-year fixed rate loan. Longer-term loans will also cost you a lot more in interest, so consider making extra payments to pay off a loan 30 years earlier, or maybe go for a 15-year mortgage.

Making a down payment less than 20% of the purchase price may require you to pay private mortgage insurance, or PMI – and pay more overall in interest.

A high credit score will allow you to get the best interest rates; if you don’t have one and can delay buying your home for a year or more, you can boost your score by paying your bills on time and paying off other debts.

A silver lining for your silliest investment is that you now know all the mistakes to avoid the next time you buy a home.


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