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Investing In Your Own Note

Started by Peter, December 28, 2013, 11:00:00 PM

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rawraw

December 28, 2013, 11:00:00 PM
Hey guys!

I was curious your thoughts on something.  Say you wanted to take a loan out from LC.  If you have a LC account, wouldn't investing in your own note with excess cash in your account effectively reduce the incurred interest expense?  Say you borrow 20K at 6% but invest a thousand in your own note, receiving 4%.  The true cost of that chunk is 2% (ignoring taxes), reducing the overall interest cost.  Or am I missing something.

And I'm officially a hero member from this post ^.-

RaymondG

#1
December 28, 2013, 11:00:00 PM
You also lose the opportunity of investing this portion of money to earn return much higher than 4% in future years.

mmmm, you could move the money back to LC account. But then what's the point of losing 2% definitely and you still have those money waiting to be invested?

core

#2
December 28, 2013, 11:00:00 PM
Congrats on your new superhero status.

I think using the cash in the manner you described is quite silly.  If you used the $1000 to make an extra principal payment on the loan then your rate on that block would be 0% instead of 2% or whatever you calculated.  And if the whole reason you took out the LC loan was for rate arbitrage, then your assumption was that you could make far more than 6% and assuming that is still valid then it would be wiser to invest in more of that same high yield stuff.

It really doesn't even matter that it's your own note aside from the fact that you can treat it as risk free.  You can judge the transaction on its own merits.  Which would you rather earn on your $1k:  Risk-free 4%, risk-free 6%, or the rate that you are getting on your LC portfolio?

It might change things if the excess cash was in an IRA which you were winding down anyway.  Or if there are some cash flow considerations that you didn't mention.

ggnoob1337

#3
December 28, 2013, 11:00:00 PM
I recently took out a LC loan at 7.9%. It was fully funded by 1 investor in the middle of the night before it was even listed on LC. But had it been listed, I would not want to invest in a loan at 7.9% interest. I'd rather go for the higher interest rates using my filters with an expected 12-14% return (which is what I currently do).
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