Asked on 12 Mar 2019
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?
1 more comments
21 Nov 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.
I work at Kristal.AI, and it's my passion to evaluate various upcoming investment opportunities.
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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.
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 regardless of market conditions and your investment return. Unless u can be assured that your return is relatively safe & certain, i.e. government bonds etc, takiing the leverage could ruin your cashflow.
Kelly Trinh, Backoffice technical at financial services firm
Answered on 23 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%).