facebookShould i borrow money from the bank to invest if for example interest on my loan is 6% and i can make 10% then i should do it since i can earn enough to pay for interest? - Seedly

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Anonymous

09 Mar 2020

General Investing

Should i borrow money from the bank to invest if for example interest on my loan is 6% and i can make 10% then i should do it since i can earn enough to pay for interest?

Discussion (16)

What are your thoughts?

You should not borrow from bank as much as possible. you must account for emergencies as well. What if you are unable to work. This will cause a lost of income and you will not be able to pay back a loan.

This is called leveraging. If you are sure you're able to making higher than the 6% interest, then why not? However, a few considerations include:

1) Ability to service interests

2) Surety of investments

3) Taking on uncomfortable risk in a bid to obtain higher returns

Taking on a leverage to obtain a 4% gain may not be the best idea as you will probably be taking on higher risk in order to get thr 10% returns you are talking about. There are safer investments which can give you the 4% returns you seek.

Rais M

Rais M

25 Feb 2020

Accountant at SME

I have done this before. Borrowed 10k (1.88% over 6 months) to buy 3000 shares of Singtel at 3.08 many years ago. Thinking that the capital gain and dividend earned will cover the interest.

In theory, mathematically, it works. I did cover the interest with the dividend and capital gains. However, you need to take into consideration that you need to pay off the principle & interest on a monthly basis. If you do not have such extra cash/income to cover, you will end up incurring unnecessary additional interest and affect your credit score.

What if the stock goes the opposite direction and you ended up losing instead of a capital gain. Do you have the funds to cover the principal amount owed?

Leverage is a very helpful tool if you know how to manage it. Most important point is not to overleverage and be conservative.

The issue is certainty. For borrowing, it is certained that u need to pay the bank interest regardle...

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