Borrowing against graded cards

[Peter_Spaeth]

Originally Posted by Rhotchkiss

This is PWCC’s intended model, and personally, I think it’s brilliant theoretically but fails in reality. Some have expressed concern over licenses, interstate activity, usury laws, etc. Thats a huge deal. But assuming the legal stuff is worked out, I think it’s a great business at its core - you are fully secured (collateral will not likely drop 50% in value), you are physically holding the collateral, and you can liquidate with ease considering you have a large auction house. Borrow from investors at 5-6%, lend at 8%+ and keep the spread. The only question (aside from legal) is whether there is enough volume to make going into this lending business worthwhile - 200bps on $1mm is only $20k, and I would think one would have/want to clear $500k/year to make this business worthwhile, and the lender would need to generate $25mm of loans to gross $500k (of course, these economic terms are purely hypothetical). However, I do believe neither the investors nor the volume will be there.

First, Assuming we are using accredited investors (which we must), i doubt investors would be content with anything less than 6%, and many would require more, especially with no tax shelter on the income (e.g., depreciation, pass through expenses, etc). Second, I don’t know that you could drum up the lending volume to make it worthwhile, unless you are dealing in tons of lower-value cards, which is like death by paper cut. I imagine that (unless cards have been owned for many years), collectors owning high-value cards would not borrow at 8%; if borrowing was necessary, they would more likely resort to lower-interest, tax deductible HELOCs or business loans. Thus, I imagine most of your borrowers would be lower net worth individuals, borrowing against 3 and 4-figure cards; and remember that 50% on $1000 is only a $500 loan, at 8%, is only $40/year in interest, which means you need to make 12,500 of these loans to gross $500k in interest - death by paper cut.

Great idea in theory. However, I have my doubts that it works in real life, due mostly to a lack of volume. If it did, I’d be an investor.

Maybe not enough to change the math, but some percentage of borrowers are going to default, no?