This is as much about getting out of debt as it is about using credit smartly so as to gradually make some extra cash on the side which you could perhaps channel into some investments that yield returns on a compounding interest basis. I must be clear about one thing though – this debt interest arbitrage scheme (scheme sounds like such a bad word) is for those who are in it for the longer term and is by no means a get rich quick scheme or a get-out-of-debt-quick scheme either.

It’s all about using the effects of time to your advantage without really having to do much beyond the initial “hard work” of pretty much just applying the practice of number-slotting.

What is debt-interest arbitrage?

A debt interest arbitrageur as the phrase suggests is someone who engages in debt-interest arbitrage, which is the practice of using the small differences in the interest rates they get from different creditors from whom they borrow money and the interest-yielding return on investments they get from their investments. While this can definitely work as is (by simply playing lenders and investees off against each other), for it to demonstrate its true power you’d have to introduce a third channel through which to deploy the money borrowed.

So to go through it with a simple example, you’d identify an investment channel which offers an annual return rate that’s higher than the annual interest rate you’d pay on a loan from a different lender. You’d then proceed to invest your principal lump-sum into the identified investment channel until such time that you start getting returns, implicitly on a monthly basis.

You then pay back a loan you’d take out with the monthly returns from the investment, which has quite a selection of different implications because what it means is that you could perhaps have put down that lump sum principle from the upfront money lent to you as part of the loan. This way you get to keep the difference as cash-flow while at the same time you’re paying back the loan without dipping into any of the money from your own financial egg nest.

What you’re also doing at the same time is effectively making sure you will always have a principal to perhaps take out if you need it once you’ve paid back your loan.

The arbitraging bit of the whole process comes into play when we consider real-world examples which naturally have us working with the finest margins by way of the ROI we get from investments and the interest rates we have to pay back on the loans we have access to. A bank might lend you a lump-sum via a personal loan at an interest rate of 11% for example, whereas an annual return on a project such as one which allows you to buy solar panels and rent them to a factory amounts to 12%, in which case the difference is merely 1%.

However, it’s one percent which is effectively generated out of thin air to a certain extent and at the same time you’re paying off a debt without really doing anything.