I’ve been playing around with an arbitrage idea in my head, and I want to work out the math right now:
- Get 0% promo APR for 1 year with $11,000.00 balance transfer from credit card
- Buy $11,000 in Lending Club notes
The $11,000 balance transfer will incur a one-time cost of $440.00 up front (4% balance transfer fee).
The credit card will have a minimum payment of approximately $165.00/month.
The entirety of the cash will be invested in Lending Club notes in one transaction using their “Build a Portfolio” feature.
If the Lending Club notes have an average length of 48 months, and earn an average of 10% after fees and defaults, they will pay back approximately $275 per month, paying a total of approximately $13,200 over the (average) 48 month span. This allows for a profit of approximately $2200 at Lending Club.
After the first year of applying the Lending Club repayments to the credit card, the card balance will be at approximately $8,140 ($11,000 + $440 – $3,300).
After the 0% interest year, the credit card begins to charge interest of 5.24% – continuing to pay down the balance with Lending Club repayments, the card will be paid off in 3 years, and result in a total of about $600 interest paid to the credit card company.
The money earned after all costs will be approximately $1,160 ($13,200 – $440 – $11,000 – $600). Assuming the transfer of money out of Lending Club and the monthly payments to the credit card can both be automated, the time investment consists only of the time it may take to initiate the balance transfer, invest the money at Lending Club, and set up automatic transfers and payments.
The estimates above could fluctuate widely depending on a variety of factors:
- Actual loan lengths at Lending Club
- Actual return on Lending Club notes after fees and defaults
- Credit card interest rate changes (rate goes up)
- Credit card minimum payment requirement changes
If I am willing to bring in some of my own money after the 0% year, the $600 interest charge will be reduced, increasing the overall return. Bringing in personal money may be required to avoid losing all gains if the credit card interest rate increases substantially for any reason after the first year.
I am sure some of my math is wrong, and I haven’t thought of every contingency, but it seems as though this is a plausible arbitrage plan, giving me the opportunity to earn approximately $1,160 without using my own money, and a very minimal time investment. Even with unfavorable returns through Lending Club, it seems this arbitrage plan would more than earn enough money to cover all costs. So, what haven’t I thought through properly? What am I missing? Where are the holes? Have you executed any Lending Club arbitrage plans yourself?
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