Financial leverage is often mentioned in two different cases: as an entrepreneur or as an investor. Of course we just want to think about the view of the investor. I came across this topic while reading (and listening to) several books during my holiday.
Many financial experts advice me as a reader to use “other peoples money”. And other peoples money is something like a loan, credit or similar things.
The idea is to leverage P2P lending. What do I have to think about? What are the risks? And is it possible and will work out?
Financial leverage for an investor
There are a lot of advertisements on Youtube, which show you, how easy investing is with other peoples money. And yes, it is quite easy. But the products they are talking about are daytrading, leveraged certificates or options. In my eyes this is gambling. Especially for me, because I do not know anything about those products.
What about borrowing money from your bank to invest it?
I think that investors should just invest the money they have in their account. But just imagine you do not have that much money in your account, and you see a chance passing by. I would surely think: “Damn it, I missed the chance”!
There are several investors for e.g. stocks, who follow their strategy. And when it is time to invest, they invest as much as they have – and even more. The idea is to leverage the investment and get more on return, than they have to pay as interest.
Leverage with 1.000 Euros
Maybe it is more clearly with an example: You have 1.000 Euros in your account. And your signals and strategy say it is the right time to invest into a stock XYZ. The price is 100 Euros per share, so you can order 10 shares. The price rises within one year to 12 Euros. Additionally the company pays a dividend of 4%.
After one year your 1.000 Euros increased to an amount of 1.200 Euros for the shares and (minimum) 40 Euros from the dividend payment. Imagine you invested 2.000 Euros? Or even more money with an interest of 2%? Your return would be much higher.
For example you invested 2.000 Euros. Of course you have to do the repayment. Let’s say you repay the investment in 48 months (4 years). Your repayment per months will be around 21-22 Euros. You just need to sell 6 shares after one year.
That is six times 120 Euros, which equals 720 Euros. Additionally you received minimum 80 euros of dividend, which sums up to 800 Euros. The rest of your credit is just 776 Euro. So your “win” is around 400 Euros for the whole investment.
- 2.000 Euros investment
- 400 Euros through price-increase
- 80 Euro dividend-payment
- 2.480 in total
- payment during the first 12 months
- 40 Euros interest payment for the loan
- 736 Euros repayment
- 2480-264-736-40 = 1.440 Euros
Do you agree on this calculation? Why is not working in your eyes?
Is it possible to leverage P2P lending?
Why not? Those calculations often look very easy and in a get-rich-quick-style. You always have to take the risk into consideration. Prooving the risk is essential, so do never believe in those calculations with your first sight.
Here it is was just an example to explain how leveraging works.
P2P lending might be an interesting idea for financial leverage. The interest rates seem quite high and the repayments are secured (until now). Why not investing other peoples money into P2P lending?
Let’s make a test-run
To be honest I HATE debts. I have had enough of them in my life and I do not want them any more. But for you I will make a small credit to invest the money into P2P loans. Challenge myself 🙂
Those feelings are emotions. And you should never invest with emotions, also it is very hard to follow that rule. But if everything fails I will be able to make the repayment. So I feel like I can cope with the risk. Let’s give it a try.
My idea is to invest 1.000 Euros on one platform. The P2P loans have to be secured with a buyback guarantee. And it has to be one of the biggest platforms. That is enough security for me to have a try also it still feels “wrong” somehow.
Choosing my bank wisely
In times of very low interest rates in a bank you can choose between several offers. In Germany we have a platform named Check24.
Just insert your data and wishes to receives offers. I was able to use a campaign where I have to pay no interest at all.
Any interest rate is right here, as well as you feel comfortable with the bank. I am not interested in the bank, so I choose the best offer for me. In the end the interest rate from the bank has to be reduced from my “win”.
A good offer like this increases my personal interest rate for the investment, because the loan is without any credit costs for me.
”Close the deal” – Financial leverage for Dummies like me 🙂
I was wondering, when I had choosen the offer, which I wanted to use. Shortly after that I had to identify myself via a web-video-session with my passport. Less than 5 minutes later I had an email about the positive evaluation.
So roughly 10 minutes after I had choosen the offer I had the official confirmation of the bank in my account. The money was transferred to my account the next day.
That was quite a cool experience, as we are usually very old-fashioned here in Germany. We do things the same way we did them the months and years before. But no, I never to walk to a bank or make an official letter with a copy of my passport.
It was quite spooky to upload my salary statement, but this is another topic here in Germany – not talking about money.
Start the financial leverage in my portfolio
Being quite curious about the evaluation after one year I decided to transfer the money to DoFinance. I opened up a new account and send the money there. Maybe DoFinance does not fit with my requirements as one of the biggest platforms.
But thinking about it they have quite a lot of experience and the interest rate of 12% is just a bit below Mintos (in my case).
You can read my DoFinance-post here. But additionally DoFinance had a cashback that time and I received 1% of my investment on my investment account. So there is no difference between my usual Mintos account and DoFinance concerning the interest rate.
By now my P2P lending portfolio is leveraged. That sounds quite unexpected for myself, but there are working 1.000 Euros for me, which are just lent and not mine. I had chosen this size of the borrowing, because I am able to pay the rates “privately”, when all P2P platforms close at once. This is still the risk, but it is decreased every month with every repayment of the interest rate and of course.
Repayment from my private account
Something you have to think about when doing financial leverage is the repayment of the loan. Usually I would have to payout the rate of 83,34 Euros every month deducted by the received interest rate.
Here DoFinance is a bad idea. For reaching the 12% you have to invest your money for 12 months. And you are not able to make a payout. As there is not second market, there is no chance to get your money back earlier.
So, this process would work with Mintos for example. Here you have to check the status of P2P loans, which are “late” and therefore not able to be paid out. Depending on the share of not-current P2P loans you will not be able to pay the last rates of your credit. Maybe, if you do not deduct the received interest from the repayment, it will work out. But that is quite a risk to rely on it.
Fully leveraged – is it possible?
As I m not “leveraging” P2P in the right leveraging-idea, I would like to show an example. Therefore you can choose any sum you are able to borrow from your bank. To make the example “easy to understand” I choose 10.000 Euros.
Currently I am offered an interest rate of 0,99% depending on my creditworthiness. If this is very bad they have the chance to change the interest rate, as their risk of my repayment is much higher. Let’s assume I receive the money for 0,99%, which is a repayment of 108,37 Euros per month.
The loan inquiry was selected to be repaid within 96 months, which is eight years. Calculating 108,37 times 96 the credit will cost me 403,52 after eight years.
Investing the 10.000 Euros over several platforms you have to “reach” a minimum interest rate of 10,9% to make your repayment every month. I think this is quite realistic, also this case is nothing for me.
Currently it should not be a problem to get this interest rate of about 11%. It is just a bit of working time to find the right P2P platforms, where you are able to make a payout every month.
4.446 Euros interest after 8 years
Sounds good, right? Well, in fact it is. If you calculate 10.000 Euros from the start invested with 12% per anno, you will receive 100 Euro the first month. At the beginning of the next month you have to deduct the amount with 104,17 Euros, which is the repayment rate (without interest). So you still receive interest from your investments for 9.895 Euros, which is around 98 Euros.
Summing all up the investor is debtfree after 8 years. The repayment of the 10.000 Euros is done and the credit costs are 403,52 Euros. But what is the leveraged “win” out of this investment?
If you add all interest payments together from the investment, it sums up to a total of 4.850 Euros. Therefrom you have to pay the credit costs, so 4.446 Euros will be yours.
This is why I would not leverage my P2P
Also the win and the whole doing sounds very good and easy, there are several things I would like you to take into consideration:
- Depending on your income you have a debt from 10k, which makes you less flexible for your rest of living expenses. Still debts are bad in my eyes, but if your car breakes down or you have to move, the bank will maybe not give you a new loan in the amount you wished to.
- Today 12% seem a usual interest rate. Also we have not experienced what the P2P platform will do when several loan originators break down. The buyback guarantee works out at the moment and is a very cool thing for investors. Still there is a risk, that the platforms or/and originators will not pay the buyback, when P2P is face with crisis.
- Maybe this is just a personal thing, but I do not feel comfortable with bigger debts. For me it feels like bound. I am not able to do what I want, because I have the commitment to pay the 108,37 Euros every month for the next 8 years. This might be the reason I am not getting financial independent within the next two years, but that is ok. No thanks, no brainfuck for me!
Financial leverage is possible. But before investing or doing it, you have to think about the circumstances. Maybe you make yourself a list, like I did, and write down what are you afraid of and what are your goals!
Financial leverage is perfect for people with possibilities
As you have seen leveraging P2P is of course possible. You can invest money from banks and put the interest rate into your pocket. Maybe I am scaredy cat, but I do not like the idea to do in a “big style”. My investment of 1.000 Euros are okay at the moment. It will increase my passive income with about 120 Euros the next months.
The more you are independent from money and fears, the better you are able to arrange with this idea. I think especially people with a bigger financial stock than I have are able to use the advantages of investing other peoples money.
As long as they are able to make the repayment out of their own money (if something goes wrong), it will makes further risks less meaningful. You will just lose money, but not your flat, your car or whatever.
And of course you have to feel comfortable with it. When financial investments are economical useful that does not mean, that you will not the problem. In my case I think I would be able to borrow 10.000 Euros, but I am not feeling good with this idea.
As I mentioned it bounds me someway and I guess I will waste a lot of time with checking the investments, to avoid any problems. I guess I will be able to even make more money than those 4.500 Euros within the “scary-time”.
What do you think about financial leverage? Do you leverage your P2P investments?