Author Topic: Double Dipping? Borrow to Invest in LC?  (Read 3758 times)

OrthoInvest

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Double Dipping? Borrow to Invest in LC?
« on: December 26, 2012, 12:19:44 PM »
Being brand new to this, I was thinking last night...

Anyone Borrow money from LendingClub to turn around and invest in Lending club?

Why not take out a 20k loan and then open a Prime account?

I have good credit and could probably get a 6% interest rate...then invest the 20K at a higher level...the difference should make at least a 5% net gain?

Probably too risky -- and probably better ways to get money? Maybe a 0% APR credit card?

Thoughts?

Zach

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Re: Double Dipping? Borrow to Invest in LC?
« Reply #1 on: December 26, 2012, 12:33:40 PM »
Being brand new to this, I was thinking last night...

Anyone Borrow money from LendingClub to turn around and invest in Lending club?

Why not take out a 20k loan and then open a Prime account?

I have good credit and could probably get a 6% interest rate...then invest the 20K at a higher level...the difference should make at least a 5% net gain?

Probably too risky -- and probably better ways to get money? Maybe a 0% APR credit card?

Thoughts?

There is another (pretty lengthy) discussion floating around about using a 0% APR intro credit card to invest with Lending Club. I feel that the consensus (by most) was that its probably not a good idea unless you have the cash ready to loose or pay off the credit card before the real APR kicks in - otherwise you could be stuck in debt if the LC investment doesn't pan out. Also, the intro APR is more than likely going to end prior to the repayment of your principal in a 3 year loan.

Personally, I agree that if you have the cash in the back (and are willing to take the risk of an entire principal loss with the investment) than it can be a good strategy (but don't max out the credit card - will hurt your credit).

In terms of borrowing money from LC -  that I probably wouldn't do regardless. It seems hardly worth it. The more you borrow (even with tier 1 credit), the higher the interest rate anyway. For $20k, you probably won't get that 6% rate.

Here is the link to that other forum discussion:
http://www.lendacademy.com/forum/index.php?topic=512.0

yojoakak

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« Last Edit: December 26, 2012, 02:08:40 PM by yojoakak »


AmCap

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Re: Double Dipping? Borrow to Invest in LC?
« Reply #4 on: December 26, 2012, 07:56:15 PM »
Yeah this is just leverage, not Merlin's magic.  Investing in a P2P platform with money borrowed from a P2P platform probably wouldn't be economical unless you had rock solid (and I mean rock solid A1 6-7%) credit.

However, if you have a lot of home equity or other assets you can borrow against, I don't see why you wouldn't try in a limited way, given that rates are so low.

Zach

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Re: Double Dipping? Borrow to Invest in LC?
« Reply #5 on: December 26, 2012, 08:58:01 PM »
However, if you have a lot of home equity or other assets you can borrow against, I don't see why you wouldn't try in a limited way, given that rates are so low.

I think this option would be better suited than either a credit card intro rate or Lending Club loan. The low rate of a home equity loan and longer terms would be beneficial for investing in p2p loans (from the perspective of 3 or 5 year terms). My thoughts on this situation are again contingent on your access to all capital that is borrowed from any source of credit in a liquid, CASH account (that you are prepared to lose should your investment fail).

hippo387

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Re: Double Dipping? Borrow to Invest in LC?
« Reply #6 on: December 27, 2012, 07:50:43 AM »
Some 401k plans allow you to take out a "loan" from your retirement savings and pay it back to yourself with interest over a 5-year term.  There is no penalty for early withdrawal as long as you pay yourself back on time.  If you have a stable job, this is one way leverage could work if you're so inclined. Caveat emptor.

Zach

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Re: Double Dipping? Borrow to Invest in LC?
« Reply #7 on: December 27, 2012, 08:19:33 AM »
Some 401k plans allow you to take out a "loan" from your retirement savings and pay it back to yourself with interest over a 5-year term.  There is no penalty for early withdrawal as long as you pay yourself back on time.  If you have a stable job, this is one way leverage could work if you're so inclined. Caveat emptor.

This would probably be the absolute worst idea for money leverage from a source of credit. First off, you're paying double taxation on any amount that you withdrawal (first when you take a loan from it, a second time when you withdrawal it during retirement), then you pay a 10% penalty if you are under the age of 59.5 on the amount of the withdrawal.

DON'T DO IT! You'll more than likely loose money.

hippo387

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Re: Double Dipping? Borrow to Invest in LC?
« Reply #8 on: December 27, 2012, 02:11:01 PM »
zpbfsg: You are quite incorrect, it depends on the 401k.  I'm not talking about a withdrawal.  Some plans allow you to take a general purpose loan, which is NOT taxed and NOT subject to an early withdrawal penalty as long as you pay it back according to the terms. You are only taxed once when you retire, just as all regular 401k withdrawals are taxed.

If your plan allows what I'm referring to, it is a decent form of leverage because any interest paid is actually paid back into your own 401k.  However, in one sense it is not true "leverage" because the money is yours to begin with, albeit in a retirement account.

Obviously one is subject to the rules of one's specific 401k plan.


Quote
This would probably be the absolute worst idea for money leverage from a source of credit. First off, you're paying double taxation on any amount that you withdrawal (first when you take a loan from it, a second time when you withdrawal it during retirement), then you pay a 10% penalty if you are under the age of 59.5 on the amount of the withdrawal.

Zach

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Re: Double Dipping? Borrow to Invest in LC?
« Reply #9 on: December 27, 2012, 03:17:37 PM »
zpbfsg: You are quite incorrect, it depends on the 401k.  I'm not talking about a withdrawal.  Some plans allow you to take a general purpose loan, which is NOT taxed and NOT subject to an early withdrawal penalty as long as you pay it back according to the terms. You are only taxed once when you retire, just as all regular 401k withdrawals are taxed.

If your plan allows what I'm referring to, it is a decent form of leverage because any interest paid is actually paid back into your own 401k.  However, in one sense it is not true "leverage" because the money is yours to begin with, albeit in a retirement account.

Obviously one is subject to the rules of one's specific 401k plan.


Quote
This would probably be the absolute worst idea for money leverage from a source of credit. First off, you're paying double taxation on any amount that you withdrawal (first when you take a loan from it, a second time when you withdrawal it during retirement), then you pay a 10% penalty if you are under the age of 59.5 on the amount of the withdrawal.

I forgot that I was responding to your comment on the loan, sorry. A loan still has some disadvantages regardless. If you can't pay the loan back, or leave your current employer you are in mess, but a loan certainly is not as bad as a straight withdrawal :)