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As a federal employee, you are probably aware of most of your
benefits ranging from the Thrift Savings Plan (TSP) to participation in
the Federal Employee Health Benefits Plan (FEHB) along with a generous
leave system and good job security.
You can even get a loan from the Thrift Savings Plan (TSP) at a very good
rate. The interest rate you pay for your loan from the TSP is the interest rate
for the G Fund at the time your application is processed. The interest you pay
on the loan will go into your TSP account, along with repayments of the loan
principal.
Apparently a number of participants in the Thrift Savings plan have a need to
borrow money. There is currently about $7.2 billion in outstanding loans from
the TSP.
But there is a disadvantage of borrowing money from your TSP. That money in
your account is for your future retirement. And, when you get the loan, the
money is removed from your TSP account. You lose the earnings that would
normally accrue in your account while the money is in your hands.
While the money is put back into your account when your loan payments are
posted, you are probably going to have less money in your account for your
future retirement than you would have had if the money had stayed put.
For some people, they may end up paying more for their loan than they
realize. This information from the TSP website explains why:
"Some participants ask about the "double
taxation" of the interest portion of their loan payments. Here is the reason
why this occurs.
When Congress enacted the Tax Reform Act of
1986, it specifically provided that 'no deduction is allowed with respect to
interest paid on [a loan from a qualified plan like the TSP]' and "no basis
is allowed with respect to any interest paid on a loan from a qualified plan
[like the TSP]." H.R. Rep. No. 99-841, at II-465 (1986) (Conf. Rep.) as
reprinted in 1986 U.S.C.C.A.N. 4075, 4553; Internal Revenue Code § 72(p).
This means Congress decided that a participant
paying interest on a plan loan will pay income taxes twice: once when the
participant pays the interest with after-tax dollars and again when the
interest is distributed from the participant's account."
If you need a loan, as a federal employee you may be able to get a loan from
another source at a better rate than is available to most Americans. Think
if it as another federal employee benefit.
This benefit isn't provided for you by Uncle Sam but, by virtue of your
status as a federal employee or even a retired federal employee, you may
still benefit from "peer to peer lending" or P2P.
This program is not specifically for federal employees. But, when I first
heard about it at a conference by well-known financial analyst Tobin Smith
(no relation), Smith was explaining a new idea epitomized by a company
called
Lending Club and why federal employees or military personnel are often a
good credit risk.
His presentation caught my attention. It appears to capture the relatively
new options offered by the internet and helping out people who want to get
a loan or those who want to have an alternative investment by loaning money.
In effect, the program cuts out the role of the traditional banker.
People who want to borrow money go to the website and request a loan. Those
willing to lend can loan money to others by reviewing notes submitted by
potential borrowers indicating the reason for the loan and reviewing their
financial information provided by the website. Before getting back home from
the conference, I went to the Lending Club website, filled out the
application form, and opened an account to invest a small amount of money to
people requesting a loan.
Those that borrow money usually get a better rate than they will get through
a bank (but at a higher interest rate than you will pay for a loan through
the Thrift Savings Plan). Those that loan the money generally receive a
higher interest rate than they will get through most investments such as a
certificate of deposit or a corporate bond.
A person who wants to borrow money explains the purpose of the loan and
provides the company with the necessary financial information. The loan rate
is based on the usual factors including credit score, job stability, debt to
earning ratio, etc. Each lender can review the information (the name of the
borrower is anonymous) and the lender uses the Lending Club programming to
decide how much to lend to a particular borrower.
The more risky the loan, the higher the interest rate that the borrower will
receive. And, of course, the higher the potential for the borrower skipping
loan payments.
In extolling the virtues of Lending Club, Smith mentioned the ideal borrower
is often a federal employee or in the military. Many of these potential
borrowers have worked for a federal agency for a few years. They have secure
jobs; they are paid more than the average American; and many of them aren't
going anywhere until they retire.
In effect, federal employees who have a good credit rating are a good
candidate for lower loan rates than many other Americans will be able to
get.
For example, Lending Club's rate for the best credit risks is 7.89%, whereas
the bank rate for personal loans, on average, is over 13%. A credit-worthy
borrower gets the money faster and for 5% less. And, if you have been using
your credit card to finance purchases, you may find you are paying much
higher rates.
One of the most common reasons for getting a loan is to pay off the credit
card debt and pay a lower rate. Of course, that assumes you have the
self-discipline to tear up or quit using the credit cards and creating a
bigger financial hole than you may have already been in.
Investors who make the loans have averaged returns of over 9.5% since the
program was started in 2007. There is risk involved as some people default
on their loans. The average rate of return takes these defaults into
account. Investing in a few riskier loans can increase the rate of return
for a lender but, not surprisingly, the default rate is higher among those
borrowers who are paying the higher interest rates.
After the presentation, I decided to try out the system. I did not need a
loan but had a small amount of money to invest that I was willing to risk. A
borrower may request an amount for a loan and hundreds of people may
contribute as little as $25 toward that loan.
As a lender, I looked for federal employees with a good credit score and a
few years of having worked for Uncle Sam. There were not that many federal
employees listed but I did find a few.
That has generally worked out well. It isn't perfect. One Army employee who
had 10 years with the Army borrowed $20,000 for a home improvement project
and had a pretty good credit rating. As an illustration of the risk you are
taking should you decide to loan money, this person has has not made his
loan payments and the Lending Club is going through its collection process
to try and recover the money.
Managing your money is a personal matter. Generally, not borrowing money is
the best option if you can avoid it. With $7.2 billion in outstanding loans
through the TSP, a large number of readers have decided they need to borrow
the money for a variety of reasons.
If you need to borrow money, consider your options and decide which option
is the best one for you.
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