Hedging with Lending Club I

by Rocket Finance

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This post is part of a series on how to increase your return on balance transfer arbitrage by using Lending Club. Balance transfer arbitrage is the practice of acquiring large sums of money from a credit card at 0% interest, depositing the cash in the bank and then profiting from the interest. Stoozing is not for everyone and should only be done after you have invested time and planning and only if you do not plan to buy a house, a car or refinance any major loan in the near future. Lately, the return on bt arbitrage has been greatly reduced by the low savings interest rates at ING Direct, FNBO Direct and other online banks. Last year it was fairly common to see savings APRs of 5 or 6%. Right now, the best rate I am getting is 3.86% at FNBO Direct.

This is where Lending Club comes in.

Here is the challenge: the balance transfer money is not yours. You will need to pay it back at the end of 12 months. You can keep the interest, but the principle is owed to the credit card company. So don’t lend it all out at Lending Club and hope to get it back in time to pay off your card. Furthermore, in order to preserve your 0% introductory rate, you need to make monthly payments on the card, typically about 2% of your outstanding balance.

Here is one method to maximize interest and minimize risk based on a fairly conservative balance transfer amount of $40,000:

In the first month deposit $39,000 into a liquid savings account. Let me know if you need an ING referral, but FNBO’s rate is higher at 3.78% APR right now.

Lend $1,000 at Lending Club and collect a $50 bonus for an immediate return of 5%. Lend the $50 out too. A conservative rate of return at Lending Club is 11% APR.

In the first month, your money at FNBO will earn $122.85 and you will receive a payment of $32.57 on your Lending Club loan. You will also have to make a payment of $800 to your credit card companies.

At the end of 12 months, you will have a balance of $32,233.75. You will owe the credit card company a balance of $32,029.25. However, you will have received $410.39 in Lending Club payments for a total of $614.89 in liquid cash. You will receive another $820.80 over the next two years. Your total profit on the $40,000 balance transfer will be $1,435.70. If you were to simply leave your balance transfer money in the savings account, you will have earned only $1,360.

If you want to really increase your rate of return, continue to re-lend your money at Lending Club as your payments come in.

  1. 7 Responses to “Hedging with Lending Club I”

  2. By lulugal11 on Feb 14, 2008 | Reply

    This is assuming your borrowers on lending club pay back and pay on time. While lending club does have a very low rate of low payments and non payments you still need to make your readers aware of the possibility of a loan defaulting.

  3. By rocketc on Feb 14, 2008 | Reply

    Thank you for pointing this out – You are correct. I am forwarding an idea, proceed at your own risk. :) I did not choose this particular strategy. The strategy that I am using will be shared next week.

  4. By Odnal on Feb 15, 2008 | Reply

    Are you serious that a credit card company will give you a $40k balance transfer? That seems like an absurd amount. I was thinking that the limit tended to be in the $5-10k range.

  5. By rocketc on Feb 16, 2008 | Reply

    $40K is usually the result of several cards. My total bt amount is close to 70K. I know of several people who have succeeded in getting well over $100K. I is a science. :)

  6. By Tom on Feb 17, 2008 | Reply

    You may want to look at Matt’s article about borrowing to lend on Prosper.

    http://prosperlending.blogspot.com/2007/07/borrowing-money-to-lend-on-prosper-wise.html

    The situation you propose is a little bit different but many of the same things apply. There is money to be made but the risks, I think, are pretty high for the limited return.

  7. By rocketc on Feb 17, 2008 | Reply

    True. . . your mileage may vary and there are risks.

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