Intro: Hedging with Lending Club

by Rocket Finance

I made my second set of loans at Lending Club last week. I plan to lend $50 to $100 every month for the rest of the year. Each month, I will use a different set of criteria in order to spread out my risk and optimize my rate of return. In January, I took on a medium risk portfolio for $100. I should net an annual return of 11.52% on the existing balance or 18% over the entire life of the loan on my $100. Lending Club loans have a fixed term of 36 months. For my February portfolio, I decided to adopt stricter lending criteria and only three borrowers passed muster. I gave them each $25 and all three loans have been finalized. My weighted average return on this portfolio will be “only” 10.31%.

As the APR’s of online savings accounts begin to decrease, I am considering an increase to my Lending Club loan amounts in order to “hedge” my credit card arbitrage an maximize interest. Credit card arbitrage or “stoozing” is the practice of obtaining balance transfers from credit cards at the 0% introductory rate and then depositing the money into high-rate savings accounts thereby profiting from the interest. Two of the best 0% balance transfer cards on the market right now are Blue by American Express and the Sony Platinum Visa – both offer 12 to 15 months of 0% interest and capped balance transfer fees.(Blue by Amex now 0% on purchases for up to 12 months and 2.99% on balance transfers for 12 months) When I first started my credit card arbitrage, almost a year ago, there were several online banks offering 6% interest rates. Now, most of my money is at FNBO Direct earning 4.3% – not too shabby – but the loss of 1.7% will reduce my earnings considerably.

To make up the difference, I am looking at several different techniques using balance transfer money and Lending Club to pump up my rate of return – also keeping in mind that money lent at Lending Club is not liquid. A key component of balance transfer arbitrage is that the money must be kept in safe, liquid accounts. It is not my money, so I don’t risk it! Next week, I will present the first method for balance transfer hedging with Lending Club.

Until then, please consider joining Lending Club through my affiliate link, they are offering a $25 bonus for anyone who joins – borrower or lender. But if you are a lender and fund your account with $1,000, they will credit your account with a $50 bonus within a week of funding.

  1. 12 Responses to “Intro: Hedging with Lending Club”

  2. By Susan Kishner on Feb 7, 2008 | Reply

    I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.

    Susan Kishner

  3. By Odnal on Feb 7, 2008 | Reply

    Do you have any tricks to get a high credit limit on your 0% credit card? Do you just have to ask for it? I’ve tried credit card arbitrage once before (before I knew that there was even a name for it) from one of my current financial instituation (USAA), but my credit limit was only $4000, which limited the benefit.

    Also, when I had it, my 0% card, it required minimum payments of about $72/month. Is that normal?


  4. By rocketc on Feb 7, 2008 | Reply

    The payments sound normal, but there are definitely some techniques for getting higher credit limits. I should do a post on it. . .but here are some basics:
    1) beg
    2) combine other cc’s from the same company
    3) get an AMEX card – they are extraordinarily generous.
    4) the smaller banks are less generous (like USAA)
    5) stick to Citi, Chase, Amex, and BOA

  5. By rocketc on Feb 7, 2008 | Reply

    Balance transfer arbitrage is not for procrastinators or the faint of heart and should be entered into only after a great deal of planning.

  6. By Odnal on Feb 7, 2008 | Reply

    I might have to revisit the idea with a different card then. I didn’t redo it because I just hate seeing that debt on my net worth graphs 🙂 But if I could get a $10k limit and make a free $500 or so, it might be worth it to give it a try again.

  7. By rocketc on Feb 7, 2008 | Reply

    My two highest credit limits ever have been the Amex Blue (not Blue CASH) and the Sony Platinum Visa. The Sony comes with balance transfer checks that you can deposit right into your bank and the bt fee is capped at $75. When I bt-ed from the amex blue, there were no bt fees.

  8. By Tom on Feb 17, 2008 | Reply

    I think it is wise to limit the monthly investment to $50-100, especially as a new lender. Many new lenders jump in with thousands of dollars and regret it as some of the higher interest loans start to default.

    I look forward to following your lending experience.

  9. By rocketc on Feb 17, 2008 | Reply

    In essence, I am “dollar cost averaging” at Lending Club.

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