Leveraging Lines of Credit

[Mary McGinty]

What experience do you have with leveraging lines of credit with credit cards?  How did you use it?  If used as a private lender, please share your workflow.  

Thank you  Mary

[Alex Breshears]

Hi Mary! Great question. The process you are looking at is called yield arbitrage.  Basically you borrow money under these set of terms at this interest rate - and then you lend it out (hopefully on terms that work with the original lender money) and at a higher rate than you borrowed it.  For example if you had a business line of credit that was simple interest at 6%, then you could use that to then lend out for maybe 12% - again simple interest - and you are making 6% on money that wasn't even yours to begin with!

What gets tricky is that if that original pot of money included parameters like it is interest only for 12 months - and then you end up doing a loan for longer than 12 months - your monthly payment on that loan may be higher than what you are getting in payments from your borrower. In addition, if your borrower stops paying - you also have to continue making payments on the debt you have taken out. It is for this reason that this method is more risky then lending out capital you already have access to. If being able to cover that debt payment isn't a concern, that would obviously make it less of a risk to you personally.

If you are interested in learning more about private lending - like evaluating a borrower or a deal they are bringing to the table, I am a coauthor on a book in the BiggerPockets bookstore that will be the literal how to manual to do a private loan, and we do talk about sources of capital and the pros and cons of each in the book. https://store.biggerpockets.co...

I hope that helps!