Bank Loan into Funding Circle?

NorthernMonkey1

I can currently borrow £10,000 from my bank at 3.3% (I've got good credit so I'd get this rate) and the estimated rate of return after bad debts at Funding Circle is around 7.5%

I could borrow from the bank, then put all that cash into P2P lending, and make £400 a year for doing not a lot.

Why would this not be a good idea?

Thanks

NM

Stevie_Palimo

The money/profit is not guaranteed and why bother with all the hassle for a just £400.00 in profit.

Thrugelmir

Have you actually applied for and received a loan at that interest rate?

Biggles

You might make 7.5%, though my rate wasn't much more than half that, which is why I stopped using FC. You could easily make a loss.

Even if you did well, and you also had other interest, you may well end up paying income tax on it.

Not worth the risk.

bowlhead99

NorthernMonkey1 wrote: »

Why would this not be a good idea?

Thanks

Also, don't forget to account for paying tax on your estimated £750 of interest income.

Also, consider that your "estimated" rate of return after bad debts is 7.5%, but you are perhaps not a professional credit analyst capable of making a high quality estimate based on the limited information you can get from FC, and you are not really certain of what the macro-economic conditions prevailing over the next x years (or the micro conditions specific to your borrowers) will do to the returns that you forecast.

What if the return is -7.5% or -15% instead of +7.5%? You would then be out of pocket and needing to cover the shortfall on your £10k of borrowed capital. Not a problem if you already have a £100k investment portfolio as you simply take the ups with the downs balanced out over the long term. More of a problem if the £10k debt is a material component of your total assets.

NorthernMonkey1

Thrugelmir wrote: »

Have you actually applied for and received a loan at that interest rate?

A loan I've just paid off 2 months ago was @ 3.5% so I'd probably get that. As I currently have no debt at all other than the mortgage, having a loan with repayments maybe a good thing from a credit perspective.



I do have >£100k in pension funds, however, at 37, I won't have access to them soon, however, I do earn ~£50k gross, so while no-one wants to make a loss, it's still a lot less that the liability that nearly every new Audi owner is driving around in.

Thank you for all your replies

bowlhead99

OK, so your signature says "debt free since April 2015" but you currently have a mortgage and actually you only just paid off a loan in August 2016 rather than being successfully debt free for the last 18 months as implied by the advertisement on the footer of all your posts.

And considering a £50k salary, you don't seem to have amassed much in the way of liquid assets or accessible investments in the time since you were out of debt.

If you don't have the "safety buffer" of several months' expenses in cash, and perhaps some other mainstream investments, my suggestion would be : rather than trying to use the "get rich quick scheme" approach of using borrowed money to invest in private debt assets, it would be sensible to learn to walk before you try to run.

The fact that you are not blowing your paycheque on a fast-depreciating Audi (or the lease or finance payments on one) is commendable, and that frugality will hopefully help you grow your pension pot from £100k to a real-terms £400-500k over next couple of decades to retire in relative comfort. But the more you try to make a fast buck on leveraged investment strategies, the more you have to make up out of your income or scant savings if and when they go wrong.

As an aside, if borrowing to invest is the savvy thing to do, perhaps you can extend your mortgage for a borrowing cost of lower than the 3.5% of an unsecured loan.

For example if borrowing the £10k wouldn't take you over 75% LTV, Nationwide would do you a 10-year £10k additional mortgage at about 2% (2 or 3 year fix, no arrangement fee, pay off penalty free after the fix is up) or maybe 2.5% for a 5-yr fix.

EdGasket

If it were that easy the banks would already have done it. You are taking risk on yourself that the banks do not consider worth the return. It may or may not work out but in general investing what you can't afford is a bad idea.

glentoran99

EdGasket wrote: »

If it were that easy the banks would already have done it. You are taking risk on yourself that the banks do not consider worth the return. It may or may not work out but generally investing what you can't afford is a bad idea.

the already do, they borrow money at less of an interest rate than they charge

dunstonh

crowfunding still has lots of issues. One of which is the level of disclosure and research made available. Another is the due diligence carried out. It varies significantly across platforms. Some of the platforms hold large amounts to smooth the bad debts. Others hold zero. Funding Circle holds zero capital. That makes it a higher risk option. Most P2P firms only currently hold interim permissions with the FCA. Plus, the FCA is playing catch up on it. So, don't expect regulated standards of disclosure and the risks are not as clear as they will be in the future.

Borrowing money to invest in something with an unknown default rate to put with one of the higher risk platforms is high risk.

NorthernMonkey1

Thanks for taking the time to reply, Ill try to cover the points one at a time.

It's fairly safe to say that 5 years ago I was a complete financial basketcase. I'm trying to sort that out now, and trying to learn more.

bowlhead99 wrote: »

OK, so your signature says "debt free since April 2015" but you currently have a mortgage and actually you only just paid off a loan in August 2016 rather than being successfully debt free for the last 18 months as implied by the advertisement on the footer of all your posts.

I'll edit the sig, its misleading, although was correct for ~6 months.

I currently own a flat, which is up for sale, loan of £7k taken out in Nov/Dec to pay for a few bits and bobs to help it sell on the advice of the estate agent. Only used £4000 of this, but it's now all repaid.

The plan was always to repay this ASAP, but the cash was borrowed as I believe the investment will cause an increase in value of the flat by ~£15k when it eventually sells

bowlhead99 wrote:

And considering a £50k salary, you don't seem to have amassed much in the way of liquid assets or accessible investments in the time since you were out of debt.

~£15k in the last 18months, but as deposit for the house, and in a company share save scheme which doesn't mature for a bit under 4 years, (pension payments on top of this). However, as you correctly point out the liquidity is very low.

bowlhead99 wrote:

If you don't have the "safety buffer" of several months' expenses in cash, and perhaps some other mainstream investments, my suggestion would be : rather than trying to use the "get rich quick scheme" approach of using borrowed money to invest in private debt assets, it would be sensible to learn to walk before you try to run.

The fact that you are not blowing your paycheque on a fast-depreciating Audi (or the lease or finance payments on one) is commendable, and that frugality will hopefully help you grow your pension pot from £100k to a real-terms £400-500k over next couple of decades to retire in relative comfort. But the more you try to make a fast buck on leveraged investment strategies, the more you have to make up out of your income or scant savings if and when they go wrong.

As an aside, if borrowing to invest is the savvy thing to do, perhaps you can extend your mortgage for a borrowing cost of lower than the 3.5% of an unsecured loan.

For example if borrowing the £10k wouldn't take you over 75% LTV, Nationwide would do you a 10-year £10k additional mortgage at about 2% (2 or 3 year fix, no arrangement fee, pay off penalty free after the fix is up) or maybe 2.5% for a 5-yr fix.

These are perhaps then options for when the flat sells. I can either repay a large chunk of the house mortgage, or do something else.