Is Borrowing Money to Invest a Good Idea?
April 07, 2019
Borrowing money to invest is all about risk assessment. Borrowing money to make an investment that has a low risk of default is a good idea for lenders. Investments in the stock market are high-risk.
When the return on investment is high and the risk is low, borrowing to invest makes sense. Find out whether or not it is a good idea for you to take out a loan to make an investment, and where you should invest.
Borrowing Money to Invest: Good Loan Investment Ideas
A good investment to make with borrowed money is one that will come to maturity before the loan comes due. If your loan is due before your investment matures, how will you pay it back? And, if your return on investment is about the same amount as the loan cost, it doesn’t really make sense.
The two categories of investment that are most commonly accepted by lenders are Certificates of Deposit (CD) and bonds. Other investments are accepted if it is expected t mature in less than 90 months with over 10 percent yield on the loan cost.
Certificates of Deposit (CD)
A CD is a special kind of savings that differs from a savings account. A CD is issued through a commercial bank. You can deposit up to $250,000 into a CD with a fixed interest rate and maturity date.
A CD restricts access to the funds until the date which it matures. CDs are available for short-term or long-term investments. A short-term CD carries a lower interest rate than that of a long-term CD.
A short-term CD matures in as little as one year, whereas long-term CD’s take 5 years to mature. An investment of $25 in a one or two year short-term CD yields under 0.5 percent return. An investment of $2,000 in a long-term 5-year CD, however, yields around 2.5 percent return. The more you invest for longer, the higher your return on investment.
Bonds
A bond is an investment in a borrower. A bond carries, either a fixed or variable interest rate, and a date for repayment of the principle.
A bond is issued having specified the terms of repayment, including the maturity date and coupon date.
The maturity date specifies when the initial principal investment is to be repaid to you. The coupon date specifies when you start receiving interest payments on your investment.
Should You Borrow to Invest?
A large factor to consider is the interest rate at which you can borrow. If the interest rate for your loan exceeds the profit margin of your return, it is not a smart investment. On principle, it is never a good idea to borrow at high-interest in order to pay down other high-interest debt.
Borrowing to invest is something to consider if you are able to make regular payments on your loan debt. The best position is if you can pay the loan off in its entirety, well before it comes due.
Final Thoughts
If your credit is good and your current debt is low, investing in a CD and bonds is a good idea. But, if you are in the process of paying off current debt, focus on becoming debt-free. At most, put away a small amount of saving in order to work your way to a CD or bond investment.
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