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Is this a form of hypothecation? [Archive] - Page 2 - SOWPub Small Business Forums


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Tim Thach
June 7, 2007, 03:19 AM
Hi Thomas,

I don't think hypothecation is the best term to use to describe what you are looking to do. It's based on the word Hypothetical. This is not a reassuring word when it comes to the world of finance. It is also a rather antiquated term that has to do with securing funds with a pledge of property as collateral.

I'm more certain that what you are trying to do is a self-liquidating (arbitrage) loan. Arbitrage in its most basic sense means buying low, and selling high.

In your stated situation, you're looking to "buy" the loan at 6% and "sell" it for 12%. Let's do a little math. Six percent of $25,000 is $1,500 ($26,500). Twelve percent of $25,000 is $3,000 ($28,000). Once you've repaid the Principal + Interest at 6% ($26,500) your profit would be $1,500 ($28,000 minus $26,500). Is the time it takes for this to mature worth $1,500 to you? Is it worth an additional $500 dollars to your uncle? (4% vs. 6%) Is the financial vehicle you propose to use safe enough? Can you back up your loss if it fails? Only you can judge.

Iím not trying to scare you off from self-liquidating loans. These types of loans can be done successfully, but you have to know what you're doing.

Recommended Reading :
If you really want to learn exactly how you can profit with self-liquidating loans in your home town, click on the link below to get Jim Straw's book on the subject.


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