Should I get a loan to invest?
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Imagine that you knew in 2007 that Apple’s stock would be up 135%. If you would have borrowed $100,000 to buy Apple shares in Jan. ‘07, you would be sitting on a nice $135,000 profit, minus taxes, fees and interest on the loan. That’s a nice deal for not using any of your own money.
As you can see from the above example, getting a loan to invest can dramatically boost your investment returns and create riches. Using “other people’s money” in order to take advantage of huge investment gains is nothing new. If you are a home owner, for example, you used the banks money to purchase your home, which you hope appreciates at a greater rate than your loan rate. This is using leverage in order to make money.
Sounds great, but is getting a loan to invest smart?
Using other people’s money to invest is a high-risk game, and should only be a strategy used by the shrewd, experienced investor who has the capital to repay the loan should things not go their way. Essentially when you obtain a loan to invest you are agreeing to pay for money in the future, at a premium, in order to have money today. That means you expect that money to be there in the future.
Imagine the repercussions if Apple’s stock dropped 50%. A 10-year, $100,000 loan with 9% annual percentage rate would look like this
- $100,000 investment is now worth $50,000
- $8,737.70 in interest payment for the year
- Plus loan, transaction and brokerage fees
If a deal doesn’t go your way, you have to come up with the money to cover the loss plus the interest payment on the loan.
What if you invested in the market the day before Black Monday, when the stock market tumbled 22.6% in a single day? That is the kind of risk you must be willing and able to take when considering an investment loan.
Getting a Loan to invest is not for the amateur
For the astute investor, using leverage can dramatically increase your investment returns and generate riches. This strategy does not come without big risks though and is not recommended for the amateur investor. The opportunity for magnified gains also means the risk of magnified loses. Please consult with a certified financial planner before considering using other people’s money to invest.
Thoughts from Glblguy: What do you think about using borrowed money for investments? Those that have been reading me for while know that I personally am not a proponent of using other peoples money, but that doesn’t mean it isn’t right for others. Has any of you done this? Was it a success or failure? Add a comment!
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February 2nd, 2008 at 10:31 am
This sounds just plain scary to me. If you could borrow at a low rate and invest in a relatively safe investment at a higher rate it would make sense, but I would lose more sleep that I could imagine by investing borrowed funds into stocks. There’s just too much volatility.
February 2nd, 2008 at 1:02 pm
No margin for me. Margin rates are around 10% with is the expected aggregate return. If they were 3% like the rate the banks are getting from the feds, I might consider it.
February 2nd, 2008 at 5:42 pm
I agree—not for the amateur. And there are very few professionals…most should be doing this for companies and not themselves.
Between the risk, the fees, etc….it’s just not worthwhile.
February 5th, 2008 at 11:42 am
Yea… no thanks. Margin is too risky for me. I’ll stick to using my own money. The thing about using other people’s money to buy a house is… you’re buying a house. It is insured and not going to disappear overnight (although as we all know, the value can plummet, too).
February 21st, 2008 at 10:27 pm
I do quite a bit of leveraged investing. It does add risk to my portfolio but I’m ok with the amount that I do.
I also buy fairly stocks (relatively speaking of course) to buy using leverage.
Mike