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Tuesday, 19 April 2011

Can you lend me some money?


Before lending money to others at a profit, I must check out the market.

Since I didn’t study so much, I’ll have to use my own life experiences:

1)    My broker charged me 6% interest p.a. for my margin account. To lend me money, I have to pledge “collateral” in terms of shares or cash. And not just any shares, my broker classify shares into 3 kinds of ratings: A – can leverage 3 times, B – can leverage 2 times, and C my broker just laugh at me…… I have to pay the interests charges monthly – but can put it on my tab until I hit my margin call limit (some technical stuffs I’ve no clue)

2)    For credit card companies, they lend money to me with no collateral. But the interest they charge is 24% p.a. (don’t they trust me?). OK, due to competitions, there are often “promotions” – like charging me 6% p.a. for six months if I transfer my debt from other credit cards to them.

Although no collateral needed, credit card companies require me to pay a minimum sum every month (they are so nice! I no need to pay the principal – just the interest will do. I swear they are in no hurry to get the loan back from me!? They must like me a lot!)

But miss a monthly payment, all sorts of penalties will appear out of nowhere and may even cut my credit limit! (Hey! How come they turn on me so fast?)



So if I want to be a “ah long” (illegal money lender) to lend money to debtors at a profit, 6% p.a. seems to be a good starting point – provided I use the same principle others used on me:

a)    I collect collateral of value from my debtor in advance and charge 6% p.a.

b)    Or I charge 6% p.a. for max 6 months period (hit and run; life is short!).

c)    Or I charge 24% p.a. for unlimited loan period. But I will insist on monthly minimum payments to cover the interests. If they miss a payment, I will do “free” exterior decoration services.

Now, one stranger asked me for a loan with 6% p.a. unlimited loan period. There is a sweetener that if he does not pay my loan back to me in 7 years, he will give me 2% extra to arrive at 8% p.a. How generous!

Meanwhile, I get the 6% interests in 2 semi-annual payments. But the catch is that he can opt not to pay me at all!? He can roll-over the interests into the next year. Like that also can?

That means he can promise me the “check is in the mail” perpetually!? Hang on! Did he pledge collateral to me? No! This stranger so very the brilliant!

There goes my dream of being “ah long”.  While I hesitated, many other people have jumped over me to lend money to this strange at “his terms”. And I thought if I lent money it should be at my terms?

Opportunity lost L

But I felt better after talking to professional "ah long" – they charge 20% interest per month!!! Phew! And I almost lent it out at 6% p.a. J
  

6 comments:

  1. Shhhh...... It's just a story about lending money.

    It's inspired by a story I've heard:

    A developer wrote in a contract that he will handover the completed building to the buyer once the final 12th floor is completed.

    The developer built the building until the 11th floor and never ever intended to handover the building ;)

    Just "sacrificed" the last final payment from the buyer and got a building for "free"!

    Devil is in the fine print.

    ReplyDelete
  2. Hi SMOL,

    Haha, clever story :)

    But hor, we can always sell off the loan to that stranger after you first lent it. There are lots of people who are willing to take over the loan because it seems so lucrative :)

    ReplyDelete
  3. Good story! The story confirmed that market is full of easy moneylenders and Ah Longs are smarter than them.

    ReplyDelete
  4. Hello CreateWealth8888,

    I am far away from Singapore so couldn't understand why all the fuss with the "water company" all about.

    But I must give the management points for constantly exploring new creative ways of fund raising.

    Tried with trust vehicle, market demand much higher yields than they expected..... Close it, come out with another vehicle at much lower yield than the market demanded from the previous water vehicle. (New group of lenders?)

    Brilliant! Market short memory span ;)

    ReplyDelete
  5. Hello LP,

    On the whole it's "safe"; but I not sure all the lenders have discounted the unlikely event US Treasury bonds getting a S&P downgrade. I know, very unlikely, but that's what we assume of Lehman brothers too.....

    I would rather do what you hinted. If we can pick up this "loan" at 60or 80 cents on the dollar, then we are talking!

    Vulture investing? But we need xalls of steel!

    ReplyDelete

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