Asked by Anonymous
Asked on 12 Mar 2019
Borrowing from the bank to invest is basically referred to as leverage. In case the situation is in your favour, and you are actually able to realise a return of 10% or more from your investment, using leverage will amplify your returns. However, with the possibility of higher returns, comes higher risk. In case the returns are lower, you will lose out in the investments and still have to pay the bank interest. This will amplify your losses as well. Hence, leverage shall be used with a lot of caution as the risk associated is very high. A less risk solution would be to start saving and use that for investments. This way, you will avoid the additional interest burden that comes along with borrowing.
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My immediate & gut reaction is "NO"
There's no guarantee you can get 10% back annually. But the 6% loan annual interest is guaranteed. Not to mentioned that 10% is extremely optimistic, Based on statistics, not many people can achieve this earning. (Unless you are super experience, then I'll ask if you have any tips instead XD)
My personal opinion is, you should only invest anything you can afford to lose.
Can you afford to pay the bank back should you lose this amount in your investment?
Another consideration is the payment to the bank is monthly. Can your investment service this monthly loan? Otherwise can you service this loan monthly?
21 Nov 2019
6% is a pretty high bar so using this as financing for investments is quite risk seeking (and 10% return is somewhat ambitious without a decent amount of risk). I would definitely be wary.
IF you are still keen on leveraging - you should really try to reduce down financing to at least 4% and perhaps even down to 2-3% (the former should be fairly easy, the latter would need some promos or other specials)
At the lower end, the financing cost isn't biting so hard and with the right investment choice I think worth to consider.
The short answer is Yes, but note also that there are many assumptions and dependencies in such a scenario - the liability/cost in this instance is guaranteed, but I'd think your returns are not. You'll also have to see the terms of your loan - is it callable? Is the rate fixed etc? But if you can clearly arbitrage it then by all means.
If you are taking personal bank loan. Be sure that your payroll is able to service your monthly loan. (If the bank is using your credit card to give you the loan, better be extra careful to make sure you can make your payments every month) As we put aside if you can earn that guarantee 10%. For me myself..I take loan that's around 5% interest charges for a $3000 loan. But with fix deposit at the rate of 7.5% p.a. I can make up for interest charges. Same time I know I can service my loan every month. I be doing this for the past 2 years. Same time I'm doing it on compounding interest for long term. This is personal for me. Every members have their own way. But do consider do you have other payments to make in mind or planning that may affect you. (I still had a free cash flow that's earning me a yearly dividends of 3%).
If you are sure that you can make 10%, and that you can get the 10% consistently, then sure.
However, do be cautious of investment instruments offering this relatively high dividend yield. The risks you take may be significantly higher.
Please be careful.
The interest you owe cannot dispute and is confirmed amount.
But the returns you get are questionable. It is not confirmed to get 10%. What if the returns fall?