Should I get a loan to invest?

By glblguy

Wall Street Bull
Photo by: Seth W.

This guest post is from Ryan at Millionaire Money Habits, a website dedicated to discussing how to build wealth and retire rich by developing the habits of self-made millionaires. Make sure you sign up for his RSS feed! If you are interested in writing a guest post to be featured on a Saturday please contact me.

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!


10 Responses (including trackbacks) to “Should I get a loan to invest?”

  1. Ron@TheWisdomJournal Says:

    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.

  2. Early Retirement Extreme Says:

    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.

  3. Mrs. Micah Says:

    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.

  4. NoDebtPlan Says:

    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).

  5. Four Pillars Says:

    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

  6. Severino Jose Arguelles IV Says:

    Before 2011, I had zero pesos in my account. My first investment in January 2011 was a loan with 10% interest per month. It was P20k. I borrowed money every month (p10k, p5k or p20k) at the same rate and even put in my SSS loans and pag ibig. Now it is Jan 2013 and I have P189,000 in investments and all the loans paid from my salary.

    Had I not borrowed and just waited for my salary to get up to P10k or p5k before I began investing, I would just have used them up for Red Horse beer. But now, I am happy with p189,000 and will hopefully reach p350,000 by the year’s end.

    Thanks to the loans.

    Stick to your money only if you are filthy rich or afraid of taking risks. Better yet, if you are afraid of risking your reputation for loans, then just don’t invest. Life is all about risk and those who do not agree with this must be dead.

  7. Andy Says:

    I just got a 30K SBA disaster loan pegged with a 1.66% interest rate on the principal over 30 years, I was thinking of using it at Lending Club, which allows me to spread the risk with small $25 notes spread over A, B, C rated borrowers for amounts under $10K. The default risk is about 1.53%, which is not too bad. I hope it will allow me to repay the loan little by little while also making moderate risk bets I can afford to compensate for.

  8. dgkdeck Says:

    I went to the pawnshop to pawn my mothers wedding ring for 200 dollars I bout an ounce of weed and repackaged and sold it for 560 dollars after I payed the pawn shop back the 220 dollars I had 340 profit that I used to buy more weed after a year I had almost 100000 dollars for getting a 200 dollar loan!

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