Bank Loan into Funding Circle?

jimjames

NorthernMonkey1 wrote: »

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.
NM

I made 20% last year on one investment. Wouldn't it be better to do that instead as you'd make £2000 not £400? Depends how you view the risks I guess.

steampowered

If you do indeed make 7.5% then it would work out well for you. This is no different in reality to people who take out a mortgage for buy-to-let: you are borrowing money in exchange for an anticipated income, where that income will be subject to tax and could be lower than you expect.

The problem would come if you didn't make the 7.5% you expect.

The other point people have mentioned is the tax implications - your 7.5% return from Funding Circle could be subject to income tax.

I personally have used my good credit to borrow at a 0% rate on a balance transfer credit card and invest the rest in dividend paying stocks and shares (there is only a small fee of 2% or so at the point of borrowing the balance transfer and the balance is then interest free for 18 months). Obviously there is a risk to doing that, which I am financially capable of bearing, but the reward clearly outweighs the risk for me since I expect to receive a return significantly in excess of 2% over the 18 months.

Also, as you can get mortgage rates of less than 2% now, it may be better to reduce your mortgage payments (if you are overpaying) rather than borrowing at 3.3% from your bank.

droopsnoot

jimjames wrote: »

I made 20% last year on one investment. Wouldn't it be better to do that instead as you'd make £2000 not £400? Depends how you view the risks I guess.

Yes, it's just knowing in advance which investment is going to return 20% that is the problem.


I agree, though, for someone on that salary this is way too risky to just make £400, and for someone on a lower salary it would be even worse.

Dird

You could make much more than £400 this year (12 months) by simply doing current account switching incentives & using them for monthly interest and it'd still be readily available (liquid)

Dan83

Unless you can make enough interest every month to cover the repayments, then personally I wouldn't bother. I briefly used funding circle then left, I'm not a fan. Have a look at collateral, they offer 12%.

Malthusian

steampowered wrote: »

If you do indeed make 7.5% then it would work out well for you. This is no different in reality to people who take out a mortgage for buy-to-let: you are borrowing money in exchange for an anticipated income, where that income will be subject to tax and could be lower than you expect.

There is a very significant difference to buy-to-let which is that if you take out a mortgage for buy to let, you typically have to put at least 25% of your own money up. So you might have a £200,000 buy to let and debt of £150,000. You would need a very large drop in the value of the property for you to owe more to the bank than the property is worth.

Add in the fact that a typical mortgage term is 10-20 years or more, which makes it unlikely that a short term crash in property prices will actually have any effect on you, and the risks are relatively low for leveraged investment. The main risk is that of not being able to find a tenant and pay the mortgage repayments. And even if you default, the sale of the house will most likely cover the outstanding debt. At most you will have lost what you put in - your deposit.

If you take out a personal loan and invest the lot in P2P, then on day 1 you will already be in negative equity - it is very unlikely you will immediately be able to sell the loan(s) for what you paid for them. You already have your fingers crossed that the P2P investments will generate enough income to cover the loan. If it goes wrong and your P2P loans default, you have to pay the loan out of your own money. If you can't, the bank will apply to make you bankrupt. You lose everything. Losses exceed deposits.

You would have to be very unlucky to be bankrupted through buy to let, you have to be lucky not to be bankrupted by buying investments on leverage.

mvarrier

If you are considering leveraged P2P then I would look at platforms which offer 10%+ against assets (e.g. saving stream, moneything etc). Although difficult to be sure, the level of risk of a diversified portfolio does not seem much higher than the lower interest loans on FC.
Secondly, rather than take a lump sum bank loan. You could consider stopping with interest free credit cards. Do your usual spending on cards and make the minimum repayments to accelerate the amount of new money available to invest. Always keep in positive balance (have more money invested and available than debt).