Taking out a prosper loan to buy stocks
 

Link to my loan request.

I don't want to get in a huge debate here if I can get better returns on my stocks vs. the interest charged on the loan (i have dealt with enough of those questions at prosper). I have done my own analysis and decided that I am more than willing to take that risk. I understand I could potentially lose a good chunk of change here. But I won't lose everything, as I will buy atleast 5 differnt stocks with a market cap over 1 billion. They aren't going to all go bankrupt, and if that 1 in a billion chance hits, then so be it.

Here is the basis of the calculations I did to take on this loan request:

Assuming a $25k, 3 year loan at 12%, my total amount paid would be: $29,893.32.

Assuming the following average annual returns, I would end up with this much money:

6%: 29,917.01
10%: 33,704.14
15%: 39,098.60
20%: 45,328.80
25%: 52,518.68
30%: 60,813.38
35%: 70,376.25

I don't want to get too cocky, so I am capping myself at a maximum annual return of 35%, which I actually think is achievable based on my opinion of my stock-picking ability. That is up for debate, not doubt, but I am not going to get in a pissing war here about stock picking ability. My main question is this, if you only achieve average stock market returns (8 - 10%) (and I am only 28 so have time in my favor), is this loan worth taking?

I understand the stock market could crash in the next 3 years or the dollar could crash or whatever else, but what are your thoughts assuming a normal market? Thanks in advance!

Re: Taking out a prosper loan to buy stocks
 

the rate of the loan is 12% per annum correct? then don't you have earn at least 12% per annum returns from the market to turn a profit? am i missing something here or are your numbers way off?

Re: Taking out a prosper loan to buy stocks
 

To be honest with you, I think this is a horrible idea. Unless you're buying counter-cyclical stocks, the market is a couple percentage points off its highest level ever, so how much further do you expect it to go up?

Plus, you need to dollar cost average or you'll be screwed.

If you have inside information, go for it, otherwise I do not think this is a wise financial decision.

Re: Taking out a prosper loan to buy stocks
 

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the rate of the loan is 12% per annum correct? then don't you have earn at least 12% per annum returns from the market to turn a profit? am i missing something here or are your numbers way off?

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That number is correct assuming I would make my monthly "payment" towards my stock portfolio. However, I view this loan as a way of forcing myself to save each month (as otherwise I would only save that amount maximum of 6-9 month per year). If I have to pay a few points of interest to stop me from blowing money elsewhere, it is worth it to me.

Re: Taking out a prosper loan to buy stocks
 

[ QUOTE ]
To be honest with you, I think this is a horrible idea. Unless you're buying counter-cyclical stocks, the market is a couple percentage points off its highest level ever, so how much further do you expect it to go up?

Plus, you need to dollar cost average or you'll be screwed.

If you have inside information, go for it, otherwise I do not think this is a wise financial decision.

[/ QUOTE ]

All I can say, is that as an average investor I completely agree with your analysis. However, I may be over-confident in myself and an almost certain I can beat the market, but at the same time, do not have the records to prove it. I feel like I have constantly picked great stocks over the years, but have never had the money to invest to prove it.

I have built up a solid 401(k) and Roth IRA, but have never had excess money to "play around with", thus the main reason I made this loan request.

My only investment is I bought a few thousand dollars worth of Nintendo (NTDOY) a few months ago at $36/share. I would have bought it a year ago at $18/share if I only had the funds.

I feel I am the T.J. Cloutier of the stock market. I don't do much math but i have an absolutely great feel as to what companies are going to be successful and which one aren't. I'm also still young so I know what trends are hot and which ones aren't (i.e. I can read through the hype on journalists trying to act cool).

For the main reasons stated above, I think I can beat the market. But even if I am wrong, is it worth it force myself to commit to saving the monthly loan payment each month? I otherwise would probably blow about half the payments and have nothing to show for it.

Re: Taking out a prosper loan to buy stocks
 

Well go for it man, but it sounds like you're persuading yourself into a get-rich-quick mindset. If the 5 stocks remain stagnant, this adventure will cost you a lot of money. If they drop a little bit, a whole lot more.

Yeah you're young enough to be able to take a risk like this, but at the same time, a risk like this can set you back financially a couple years as well.

Re: Taking out a prosper loan to buy stocks
 

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Well go for it man, but it sounds like you're persuading yourself into a get-rich-quick mindset. If the 5 stocks remain stagnant, this adventure will cost you a lot of money. If they drop a little bit, a whole lot more.

Yeah you're young enough to be able to take a risk like this, but at the same time, a risk like this can set you back financially a couple years as well.

[/ QUOTE ]

I agree with your post completely, assuming one thing: If I could commit myself to saving a set amount of money each month, I would not need this loan. However, since I depend on myself to transfer my own money to the stock market each month, If I would otherwise miss just one month, this loan makes it worth it for my future, as the one thing I won't mess with is my credit rating.

Even if my stocks stay stagnent, at a 0% return, I will have $25k in 3 years. If I don't take this loan, I cannot guarantee I will save $25k over the next 3 years. Does that change your mind at all?

Re: Taking out a prosper loan to buy stocks
 

NEVER borrow money to gamble. It sounds like that is what you are up to. With that said, if you must have you considered margin? It will cost less then 12%. If you are buying stocks that do not qualify for margin then you are taking a serious risk.

Re: Taking out a prosper loan to buy stocks
 

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NEVER borrow money to gamble. It sounds like that is what you are up to. With that said, if you must have you considered margin? It will cost less then 12%. If you are buying stocks that do not qualify for margin then you are taking a serious risk.

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I agree, but it's not like I'm buying penny stocks here. I am buying large-caps, worst case scenario i figure i lose 20%.

Also, I am not completely borrowing, I plan to invest on average $1,000/month into the market over the next few years. Intstead of doing that, i am taking out a loan, and my monthly payments are being used to repay the loan as a way of committing myself to a monthly payment towards my future.

Re: Taking out a prosper loan to buy stocks
 

Why don't you just set up a Vanguard index fund to automatically deduct money from your checking account each month if the prime factor hurting your returns is lack of discipline?

This doesn't seem like a good idea at all...

Re: Taking out a prosper loan to buy stocks
 

This whole thread must be some kind of joke I don't get. Between being sure you can make enough to counteract the 12% interest and being willing to pay that vig to stop yourself from spending too much money, I honestly can't believe you're serious.

Re: Taking out a prosper loan to buy stocks
 

[ QUOTE ]
Why don't you just set up a Vanguard index fund to automatically deduct money from your checking account each month if the prime factor hurting your returns is lack of discipline?

This doesn't seem like a good idea at all...

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the main reason is because I am completely confident in my ability to beat any vanguard index fund.

Re: Taking out a prosper loan to buy stocks
 

Unless you can show a long-term (ie- 5 to 10 years) of consistent outperformance at an acceptable level of risk, I'd say don't do it. I feel you're about to lose your shirt.

Besides, 12% is a HUGE hurdle to overcome. I pay a little over LIBOR rates for my margin, and even my current account overdraft rate is less than 12%.

Margin isn't really for investing - it's more suitable for trading or shorter-term investing opportunities.

If you desperately want to use margin, then I'd strongly suggest you only gamble with a small % of your portfolio. I keep a maximum of 30% of my portfolio exposed to margin, with a notional rtading requirement of around 5%. I never allow a trade or idea to risk more than 1% of my account equity.

I think you should concentrate more on preserving your capital than hitting for the fence every time.

Re: Taking out a prosper loan to buy stocks
 

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This whole thread must be some kind of joke I don't get. Between being sure you can make enough to counteract the 12% interest and being willing to pay that vig to stop yourself from spending too much money, I honestly can't believe you're serious.

[/ QUOTE ]

Although I know I am being extremelty optimistic, I am positive i can get at 20-30% annual return on my money by investing in individual stocks. Before you jump all over me, Warren Buffet says he could definitely get a 50% return on smaller portfolios.

Re: Taking out a prosper loan to buy stocks
 

[ QUOTE ]
[ QUOTE ]
Why don't you just set up a Vanguard index fund to automatically deduct money from your checking account each month if the prime factor hurting your returns is lack of discipline?

This doesn't seem like a good idea at all...

[/ QUOTE ]

the main reason is because I am completely confident in my ability to beat any vanguard index fund.

[/ QUOTE ]

If the pride is any indication, this fall will be spectacular.

eastbay

Re: Taking out a prosper loan to buy stocks
 

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Unless you can show a long-term (ie- 5 to 10 years) of consistent outperformance at an acceptable level of risk, I'd say don't do it. I feel you're about to lose your shirt.

Besides, 12% is a HUGE hurdle to overcome. I pay a little over LIBOR rates for my margin, and even my current account overdraft rate is less than 12%.

Margin isn't really for investing - it's more suitable for trading or shorter-term investing opportunities.

If you desperately want to use margin, then I'd strongly suggest you only gamble with a small % of your portfolio. I keep a maximum of 30% of my portfolio exposed to margin, with a notional rtading requirement of around 5%. I never allow a trade or idea to risk more than 1% of my account equity.

I think you should concentrate more on preserving your capital than hitting for the fence every time.

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Thanks for the advice. If you count my retirment funds, this loan is nowhere close even 20% of my proftilio. I think the worst case scenario is I MIGHT only gain 10% instead of the 13% i am paying in interest. But if i missed just 1 or 2 monthly payments I am still better off taking the loan.

I definitely agree this loan is "thinking outside the box" and would traditioanly be frowned upon. But please provide me with some calculations on how much I would actually be losing out on. I don't think it would be more than 2-3k over 3 years maximum on average. And that is worst case scenario.

Re: Taking out a prosper loan to buy stocks
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Why don't you just set up a Vanguard index fund to automatically deduct money from your checking account each month if the prime factor hurting your returns is lack of discipline?

This doesn't seem like a good idea at all...

[/ QUOTE ]

the main reason is because I am completely confident in my ability to beat any vanguard index fund.

[/ QUOTE ]

If the pride is any indication, this fall will be spectacular.

eastbay

[/ QUOTE ]

I will keep you updated. Thanks for the support.

Re: Taking out a prosper loan to buy stocks
 

This doesn't make any sense. Just invest the amount each month that you would have paid as a loan payment and I'm pretty sure you'll make more money in 3 years than your method.

Re: Taking out a prosper loan to buy stocks
 

[ QUOTE ]
[ QUOTE ]
This whole thread must be some kind of joke I don't get. Between being sure you can make enough to counteract the 12% interest and being willing to pay that vig to stop yourself from spending too much money, I honestly can't believe you're serious.

[/ QUOTE ]

Although I know I am being extremelty optimistic, I am positive i can get at 20-30% annual return on my money by investing in individual stocks. Before you jump all over me, Warren Buffet says he could definitely get a 50% return on smaller portfolios.

[/ QUOTE ]
Arod can hit 40 home runs every year. Who cares?

I know nothing I say is going to change your mind, and I don't really care what you end up doing, so I'll just continue to be sure this is some sort of sick joke.

Re: Taking out a prosper loan to buy stocks
 

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I definitely agree this loan is "thinking outside the box"

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Dude, seriously what the hell are you talking about?

[ QUOTE ]
But please provide me with some calculations on how much I would actually be losing out on. I don't think it would be more than 2-3k over 3 years maximum on average. And that is worst case scenario.

[/ QUOTE ]
Again, I have no idea what you're talking about, but if you think losing 2-3k is the worst case scenario here you might actually know less than I was giving you credit for.

Re: Taking out a prosper loan to buy stocks
 

Ummm ... am I missing something here? If you're this desperate why don't you just go on margin? The worst rate out there is probably 10% and you can get probably around 8%. This is a terrible idea IMO.

Re: Taking out a prosper loan to buy stocks
 

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[ QUOTE ]

I definitely agree this loan is "thinking outside the box"

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Dude, seriously what the hell are you talking about?

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But please provide me with some calculations on how much I would actually be losing out on. I don't think it would be more than 2-3k over 3 years maximum on average. And that is worst case scenario.

[/ QUOTE ]
Again, I have no idea what you're talking about, but if you think losing 2-3k is the worst case scenario here you might actually know less than I was giving you credit for.

[/ QUOTE ]

I'm talking about worst case scenario on average. I could always run bad and lose more.

Re: Taking out a prosper loan to buy stocks
 

worst case scenario on average. that is a new one for me.

im not going to spend much time in my response since it sounds like you already made up your mind. So ill just agree with others that this is a horrible horrible idea.

Re: Taking out a prosper loan to buy stocks
 

I agree. I have already made up my mind. I just don't see how it is as possibly as bad as you guys are making it out to be. Maybe I am wrong but time will tell. If I anyone is interested I will keep you updated.

Re: Taking out a prosper loan to buy stocks
 

Shoe,

"I'm talking about worst case scenario on average."

This is like Who's On First via message board.


"I just don't see how it is as possibly as bad as you guys are making it out to be."

Have you considered the possiblity that everyone who posted in this thread isn't wrong?

Re: Taking out a prosper loan to buy stocks
 

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I agree. I have already made up my mind. I just don't see how it is as possibly as bad as you guys are making it out to be. Maybe I am wrong but time will tell. If I anyone is interested I will keep you updated.

[/ QUOTE ]

i feel bad for people loaning you money on prosper.

You have to beat 12% after taxes to make money.

all forecasts for the domestic market are [censored], and most of the world economies are looking a bit overpriced now as well.

you might get lucky, but this is a terrible idea.

Re: Taking out a prosper loan to buy stocks
 

[ QUOTE ]
the rate of the loan is 12% per annum correct? then don't you have earn at least 12% per annum returns from the market to turn a profit? am i missing something here or are your numbers way off?

[/ QUOTE ]

You have to make way more than 12% because your gains are taxed.

P.S. This is probably the worst idea I've ever seen on this forum.

Re: Taking out a prosper loan to buy stocks
 

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[ QUOTE ]
I agree. I have already made up my mind. I just don't see how it is as possibly as bad as you guys are making it out to be. Maybe I am wrong but time will tell. If I anyone is interested I will keep you updated.

[/ QUOTE ]

i feel bad for people loaning you money on prosper.

You have to beat 12% after taxes to make money.

all forecasts for the domestic market are [censored], and most of the world economies are looking a bit overpriced now as well.

you might get lucky, but this is a terrible idea.

[/ QUOTE ]

so does that mean my investment in nintendo (NTDOY) blows? Time will tell. good luck to you too.

Re: Taking out a prosper loan to buy stocks
 

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[ QUOTE ]
the rate of the loan is 12% per annum correct? then don't you have earn at least 12% per annum returns from the market to turn a profit? am i missing something here or are your numbers way off?

[/ QUOTE ]

You have to make way more than 12% because your gains are taxed.

P.S. This is probably the worst idea I've ever seen on this forum.

[/ QUOTE ]
Can someone explain to me how the hell he's raised $15,500 on prosper already?

Re: Taking out a prosper loan to buy stocks
 

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[ QUOTE ]
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I agree. I have already made up my mind. I just don't see how it is as possibly as bad as you guys are making it out to be. Maybe I am wrong but time will tell. If I anyone is interested I will keep you updated.

[/ QUOTE ]

i feel bad for people loaning you money on prosper.

You have to beat 12% after taxes to make money.

all forecasts for the domestic market are [censored], and most of the world economies are looking a bit overpriced now as well.

you might get lucky, but this is a terrible idea.

[/ QUOTE ]

so does that mean my investment in nintendo (NTDOY) blows? Time will tell. good luck to you too.

[/ QUOTE ]

And if you feel bad fo the people loaning me money on prosper, then you are the sucker, as I am going to pay back the money no matter how my stocks perform. I take great pride on my credit rating, and this is as close as you can possibly get to a guaranteed 12-13% return on your money.

Re: Taking out a prosper loan to buy stocks
 

[ QUOTE ]


And if you feel bad fo the people loaning me money on prosper, then you are the sucker, as I am going to pay back the money no matter how my stocks perform. I take great pride on my credit rating, and this is as close as you can possibly get to a guaranteed 12-13% return on your money.

[/ QUOTE ]

Think about it rationally. If this was literally no risk, you wouldn't have to be borrowing at 13%.

If you had saved up the capital, you wouldn't have to be taking out a $25,000 lon on Prosper.com to invest.

I wish you best of luck, but you're deluding yourself into thinking this is a no-risk great move.

Re: Taking out a prosper loan to buy stocks
 

okay, I'm going to try to illustrate why this is a bad idea.

First off, if you get the lump sum all at once, you don't get the benefits of dollar cost averaging. This basically means that if you happen to invest it at a time right before a big downswing, you can end up getting in big trouble. Dollar cost averaging works in your favor. wiki

Second off, your reason for being able to beat the market is really really naive. So I'm going to go ahead and assume at best you will match the market. Historical returns show it's about 8-10%, right? Then when you factor in taxes, you lose another 2-2.5% (assuming 25% tax rate) so it's like 6-7.5% yield (assuming historical returns). You are BORROWING at 12% to earn money at a rate of 6-7.5%. That means you are netting a -4.5 to -6.5% effective yield by using this strategy. That's assuming all goes well and you are matching historical returns, which not that many investors actually get.

Sure, you have a possibility to come out ahead, say if you outperform historical market returns by a decent amount. But how much do you have to outperform the markets by to make this a +EV decision? You need to BEAT 12% in after-tax dollar returns on the stock-market over a 3 year timespan. Just how hard will this be? Well you need to get returns of 16% on the stock market (assuming 25% tax rate) over the 3 years TO BREAK EVEN. If you are confident you can get 16% on the stock market, then you should go down to wall street and get a job in some sort of i-banking or hedge fund type job. You could be making millions of dollars if you knew how to pick stocks that get 16% over the long haul. There's a reason that job pays so much, because almost NOBODY can do it.

Re: Taking out a prosper loan to buy stocks
 

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Even if my stocks stay stagnent, at a 0% return, I will have $25k in 3 years.

[/ QUOTE ]But you paid $29,893.32 for that 25k.

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If I don't take this loan, I cannot guarantee I will save $25k over the next 3 years. Does that change your mind at all?

[/ QUOTE ]Find a better way to guarantee you save the money then. I'm not sure what your job is, but there's things like automatic payroll deduction.

Re: Taking out a prosper loan to buy stocks
 

[ QUOTE ]
First off, if you get the lump sum all at once, you don't get the benefits of dollar cost averaging. This basically means that if you happen to invest it at a time right before a big downswing, you can end up getting in big trouble. Dollar cost averaging works in your favor. wiki


[/ QUOTE ]

DCA vs. Lump Sum

Re: Taking out a prosper loan to buy stocks
 

so you think you can beat the market by 12% + inflation rate (4%??) + the interest rate you can earn on your 25k? Lets say thats 15% total. You get 20% roi. thats 10k. 10k minus 7.5k leaves you with 2.5k. thats before taxes and stuff

Re: Taking out a prosper loan to buy stocks
 

[ QUOTE ]
[ QUOTE ]
First off, if you get the lump sum all at once, you don't get the benefits of dollar cost averaging. This basically means that if you happen to invest it at a time right before a big downswing, you can end up getting in big trouble. Dollar cost averaging works in your favor. wiki


[/ QUOTE ]

DCA vs. Lump Sum

[/ QUOTE ]by worked in your favor, I meant in terms of variance, not EV. I assume most people aren't completely blind to variance. Although OP might be.

Also...

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Our study looks at the problem from a different perspective. Given a lump sum, is it better to invest the entire amount immediately, or spread it out in equal installments?

[/ QUOTE ]He doesn't have a lump sum. He's taking out a loan to get a lump sum. It's clear he shouldn't take out the loan then use it for DCA.

Re: Taking out a prosper loan to buy stocks
 

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Even if my stocks stay stagnent, at a 0% return, I will have $25k in 3 years.

[/ QUOTE ]But you paid $29,893.32 for that 25k.

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If I don't take this loan, I cannot guarantee I will save $25k over the next 3 years. Does that change your mind at all?

[/ QUOTE ]Find a better way to guarantee you save the money then. I'm not sure what your job is, but there's things like automatic payroll deduction.

[/ QUOTE ]

I just have a few points to make against all the poster's in this thread. I might be being overly-defenisve, but I have yet to hear a logical arguement against my position.

A few quotes:

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Think about it rationally. If this was literally no risk, you wouldn't have to be borrowing at 13%.

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No [censored]. There is risk involved, that is why I am willing to pay 13%.

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If you had saved up the capital, you wouldn't have to be taking out a $25,000 lon on Prosper.com to invest.

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No [censored]. If I had the capital I wouldn't be requesting a loan on prosper.

[ QUOTE ]
First off, if you get the lump sum all at once, you don't get the benefits of dollar cost averaging.

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I agree, dollar-cost-averaging is great, but that is only because the market goes up over time. If you invested in a lump sum at the beginning of your investing period, you would end up with more money, on average, than your dollar-cost-averaging method (For example: Investing 12k as a lump sum every January is better long-term than investing 1k every month).

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Even if my stocks stay stagnent, at a 0% return, I will have $25k in 3 years.
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But you paid $29,893.32 for that 25k.

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But I only need a 6% return to break even on my 12% loan. See my original post in this thread. Ok, that is not counting taxes. After taxes, I need an 8-10% return to break even on my 12% loan, depending on if I pay my 15% long-term captial gains tax or short-term ordinary income tax.

Re: Taking out a prosper loan to buy stocks
 

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Even if my stocks stay stagnent, at a 0% return, I will have $25k in 3 years.
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But you paid $29,893.32 for that 25k.

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[/ QUOTE ]


But I only need a 6% return to break even on my 12% loan. See my original post in this thread. Ok, that is not counting taxes. After taxes, I need an 8-10% return to break even on my 12% loan, depending on if I pay my 15% long-term captial gains tax or short-term ordinary income tax.


[/ QUOTE ]Okay, you need 8-10% to "break even", but that's not realistically breaking even. You need to "break even" with what you could have used the money for. You have to get 8-10% returns on the market (historical averages that most investors don't even get) to break even with STICKING YOUR MONEY UNDER THE MATTRESS.

Let's just say you could have deposited those prosper payments into hsbc and got 5%. Now you have to break even with THAT. So with your 8-10% investing abilities, you are still lagging sticking it in a savings account and earning 5% risk free AND no work income. (It's work to pick stocks and pay off prosper loans, set up prosper accounts, etc).

But since you are a stock guy, you have to be able to "break even" with a DCA strategy of just making those payments directly into the market instead of through the prosper middle man.

Re: Taking out a prosper loan to buy stocks
 

[ QUOTE ]


But I only need a 6% return to break even on my 12% loan. See my original post in this thread. Ok, that is not counting taxes. After taxes, I need an 8-10% return to break even on my 12% loan, depending on if I pay my 15% long-term captial gains tax or short-term ordinary income tax.

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so what if you break even or even beat it by a small margin. The point is you'll be making close to nada while taking a lot of risk. Why even post if your not going to listen to ppl with more experience. gbye.

Re: Taking out a prosper loan to buy stocks
 

Also, this post is completely seperate from the main topic of this thread. I agree that how I plan to use the funds from this loan is up to debate, and is in no way traditional. However, from a lender's standpoint (at prosper) how is my loan possibly high-risk? I have perfect credit, and I'm not even going into debt to take this loan. If I run into bad times, I can simply sell my stocks to repay this loan. How is that more risky than taking out a loan to consolidate debt (nothing to sell there to come up with funds for the loan), or to start a new business (which if it fails there will also be nothing to pay back that loan). I think people are just hesitant to support me even though my loan is less risky than a car loan (cars generally go down in value where as stocks generally go up in value). Is that not a valid point?

Whether I can out-perform the stock market or not, I think I have a valid point. My loan is much safer than any loan a bank ordinarily will approve.