| Making money with interest - somebody tell me what's wrong |
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BigBlock
New Member
Cash: $ 1.30
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Joined: 03 Jul 2005
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| Making money with interest - somebody tell me what's wrong |
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I got this crazy idea this morning at about 4:00 when I couldn't sleep. Something's got to be wrong with my theory, but what?
Here's my idea:
My PayPal account pays me 3% of the balance that's in there every month through their money market fund. Problem is I don't have any money to leave laying around to earn money with. What if I went to the bank and got a loan for $10,000? The payment on that would be roughly $225 over 52 months at 7% interest. I could put that $10,000 into my PayPal account and leave it there, and it would be earning $300 a month. That's $75/month profit for doing absolutely nothing. At the end of the loan, the $10,000 would be mine to keep.
That is WAY too easy. What's wrong with this theory?
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Sun Jul 03, 2005 6:58 pm |
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David Briggs
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The 3% Paypal money market rate is per year. Not per month. If your cost of money is 7%, that's a loss of 4% per year.
~~David
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Sun Jul 03, 2005 8:55 pm |
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efflandt
Senior Member
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Location: Elgin, IL USA
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I plugged everything into a simple spreadsheet. And figuring in federal tax (but not knowing your state tax), as near as I can tell, borrowing money @ 7% for 52 month equal payments to make money @ 3% would net you about 89% of making those same payments to the 3% account instead, with no loan.
Even if you could still find a 2.99% unlimited time balance transfer check, you would have a hard time exceeding the no loan method, unless the typical 3-4% balance transfer fee was waived or limited to an insignificant dollar amount (like $50-75).
Bottom line is that borrowing money to make money does not make sense unless net gain exceeds all costs (taking taxes into account). Although, if loan interest is deductable (mortgage or HELOC), and/or gain is non-taxable (tax free investment or Roth IRA), it may lower the gross gain required to realize a net gain.
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Tue Jul 05, 2005 2:05 am |
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VMCAffiliate
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Saying that. 3% of 10,000 is $300 a year, which means your making no less than $25 a month.
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Tue Jul 05, 2005 1:37 pm |
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Factoring Friend
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Joined: 08 Jul 2005
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 Interesting thread. Essentially what you have described is the business model for banks and financial institutions.
Making money on the interest-rate spread is what banks and financial institutions themselves do. They bring in deposits paying 3% for the use of that money. Then they turn around and lend out that money earning 5%. The 2% difference (plus fees and bank charges) is how they make a profit.
This is a very simplistic example I've given. It is a lot more complicated in the real world what with short term borrowings that banks do, etc. -- but when you net it all out to its simplest form, that's how they make money.
However, I agree with the other commenters here that it has to cost you less to get your working capital than you expect to earn in interest on that capital (after taxes).
Bottom line: "Don't try this at home" unless you really understand your numbers precisely and thoroughly.
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Fri Jul 15, 2005 1:18 pm |
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