I need a mathematician!

abby1234519 · 15 March 2017 at 1:06PM

I'm trying to work out an answer to a friend's hypothetical question re a loan.

She has a loan for £4000 taken out 1st March for 60 months. Interest is 16.9%

She has a lump sum of £1200 in cash.

She isn't going to pay it towards the loan (even if that is the best option).

She wants to turn that £1200 into something profitable but the return would have to be greater than the interest paid on the loan.

I can't work it out. At first I thought it was as simple as the £1200 had to make more than the £650 interest she will pay on her loan in the first year but then I realised no because if she paid the £1200 off the loan she'd also save a big pile of interest. So does her £1200 need to make more than the £650 + interest saved?

If that came to £2000 (as an example) then if she made £2500 from £1200 she'd be in the positive.

Does this make sense? Going round and round and round with it.

NB - I'm not giving her financial advice, worst person to do it. I just can't work out the answer.

Arleen · 15 March 2017 at 1:19PM

There is no reliable way to earn money on money above interest rates. If there was - then why would banks not do that themselves, rather than handing out loans?

StopIt · 15 March 2017 at 1:20PM

There's plenty of ways to make more than the interest costs of that loan.

Sadly there's many ways to lose it too. Unless if your friend has a clear plan on how to make that money, be it buying/selling stuff, the bookies (lol) or going into some serious Forex/Stock market trading (Good luck with the Article 50 button about to be pressed) I'd be paying the loan off at that interest rate.

ReadingTim · 15 March 2017 at 2:37PM

Simple - if she can find something which pays a return of more than 16.9% then she'll make money. This is how banks operate: they borrow from savers at (say) 1% and lend to borrowers at (say) 5%. The difference between the two rates is their profit, and (in a nutshell) is how the entire banking system works.

MrsTinks · 15 March 2017 at 3:04PM

As said it's pretty simple - her ROI MUST exceed the apr she's paying for her loan for the amount she is choosing NOT to off set to bring her a profit. Given most savings accounts are at what? 3%? Then short of gambling (NOT CONDONED!) then I can't see how she anticipates getting this to work in her favour.
For reference in year one she would need to make £202.8 profit from her £1200 to break even.

StopIt · 15 March 2017 at 3:36PM

MrsTinks wrote: »

As said it's pretty simple - her ROI MUST exceed the apr she's paying for her loan for the amount she is choosing NOT to off set to bring her a profit. Given most savings accounts are at what? 3%? Then short of gambling (NOT CONDONED!) then I can't see how she anticipates getting this to work in her favour.
For reference in year one she would need to make £202.8 profit from her £1200 to break even.

Also, if the money is used for trading say on ebay etc, the opportunity costs must be factored in.

If she takes 100 hours of labour to make the money, then you have to value that time when making the calculations. After all, that 100 hours will be replacing something. Would it have been time that could've been spent making money in different ways, was it leisure time etc? It isn't as simple as Costs of £1200 and income of £2400 = £1200 profit, not for this sort of thing anyway.

I need a mathematician!

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