Author Topic: Playing both sides?  (Read 2932 times)

rajuabju

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Playing both sides?
« on: February 27, 2012, 08:11:12 PM »
Just wondering if anyone has done (or thought of) the following scenario:

Assuming a person has very good credit, get a low interest loan on Prosper for X dollars.

Use the proceeds from the Prosper loan to invest in loans on Lending Club that pay a higher rate.

Keep the arbitrage, while paying back Prosper over time.

Assuming I qualify for a loan on Prosper at a rate of around 7.5%... I could easily be making money by investing those funds in LC where my return is around 12%.

Has anyone done this? If so, how is it working out?

Peter

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Re: Playing both sides?
« Reply #1 on: March 01, 2012, 03:20:23 PM »
Not only have people done that but there is a name for them: blenders (as in borrowers who are also lenders). Now, not all blenders are using the proceeds to invest the money back in notes but I know several that do. And you don't have to switch between Prosper and Lending Club. You can take out a Prosper loan and invest it back in Prosper or do the same with Lending Club.

Personally, I am not a huge fan of this - I wrote about it on the blog some time ago:
http://www.lendacademy.com/investing-lending/social-lending-arbitrage-good-or-bad-idea/

It is a high risk proposition mainly because you have no way of knowing what your real returns are going to be through investing. Have a few defaults and you might find you can't pay back the loan for a while.
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Newlyfrugal

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Re: Playing both sides?
« Reply #2 on: March 04, 2012, 10:39:02 AM »
A few years ago, I participated in credit card arbitrage, in which I took out no-fee balance transfers and put the money in a checking account which earned 5% interest.  Sadly, those days of "high" interest from banks are gone.  So the CC arbitrage is less profitable and no longer enticing to me.

I was curious about "blenders" doing P2P arbitrage, which I never considered before.  I don't recommend P2P arbitrage because the risk is much higher than CC arbitrage (where the money is safe in a bank account.)  However, if you are inclined to try such arbitrage, the key is this note from Derek in My Dollar Plan:

"Note that I have enough cash held in reserve from other sources that I am able to cover my loan should the social arbitrage world end tomorrow, so my sense of risk is appropriately higher than someone who does not have that.

Read more: http://www.mydollarplan.com/social-lending-arbitrage/#ixzz1oA8nasEV"

If you have enough funds in reserve to pay off your own loan at a P2P lender and can take the risk of losing money due to charge offs, then more power to you.  I have such reserves, but do not care to do P2P arbitrage.