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Motley Fool: A tech stock and bank, in one

LendingClub is currently projected to post a sizable loss this year, but most of that is because of one-time, nonrecurring costs as it transitions to a new business model.  (Associated Press)
LendingClub is currently projected to post a sizable loss this year, but most of that is because of one-time, nonrecurring costs as it transitions to a new business model. (Associated Press)

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 the Boston-based digital bank Radius Bank – and along with it comes its bank charter, making Lending Club a bank. The acquisition will reduce LendingClub’s costs a lot, as it can fund loans with cash from Radius customer deposits instead of borrowing money at high interest rates.

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

LendingClub is currently projected to post a sizable loss this year, but most of that is because of one-time, nonrecurring costs as it transitions to a new business model. Meanwhile, it’s growing, with first-quarter revenue growing 40% from the previous quarter, and loan originations growing 63%. Take a closer look at LendingClub.

Ask the Fool

Q: What’s a yield curve? – S.F., Maryville, Tennessee

A: Imagine a simple graph that plots the current interest rates of United States Treasury bonds with maturities of three months, five years, 10 years, 20 years and 30 years. Connect all those points, and you’ll 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 of the graph and slopes upward, slowly leveling off. It reflects investors’ assumptions that the economy will keep growing.

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

Q: Can you explain “forced selling”? – C.C., Sioux City, Iowa

A: The term applies in multiple situations. For example, if you’ve invested in stocks “on margin” (with money borrowed from your brokerage), you might get a “margin call” if your holdings fall in value. You’d be required to add money to your account – which many people do by selling some shares. If you don’t take action, your brokerage may just sell some of your shares for you.

Another kind of forced selling can happen with a mutual fund. If shareholders are worried about the fund’s performance, they may sell enough shares that the fund has to sell off many of its investments in order to generate cash to cover withdrawals. If lots of funds are selling shares, that can depress overall stock prices and lead to more withdrawals – causing more forced selling. Ironically, fund managers can end up doing what they’d least like to do during a market downturn: selling stocks instead of buying more shares of lower-priced stocks.

My dumbest investment

My dumbest investment was buying my first house. I did everything wrong. – C.C., online

The Fool responds: There are plenty of mistakes you can make when buying a house, and each of them can cost you – potentially a lot.

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

Many people fail to shop around for the best interest rate and don’t choose the kind of loan that will serve them best; when interest rates are low, for example, you might lock in a 30-year fixed-rate loan. Longer-term loans will cost you a lot more in interest, too, so consider making extra payments to pay a 30-year loan off sooner, or perhaps go with a 15-year mortgage.

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

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

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

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