Borrowing to Invest- Good Idea or Bad Idea?

Editor’s note: This is a guest article from Sachin

This article would help you to understand the issues related to borrowing for investment purposes.

One of the most controversial areas of borrowing, and with good reason, is borrowing to invest. It can be a great idea, and it can be a real minefield, complete with some nasty surprises. Lenders can be skeptical, and you may also find yourself with some rather heavily-loaded loan conditions. The issues in borrowing to invest require some thought. If you’re thinking of taking out fast loans or other sorts of loan for this purpose, you’ll need to do some research on your options.

Borrowing and investment- The risk factors, explained

If you borrow to invest in property, stock markets or other types of capital investment, you need to be very well aware of the possible risks. The risks include:

• Investments going sour: This happens, and it happens regularly. The loan becomes a loss, often with no redeeming values. This is particularly common on the stock market, where stock movements can be worse than betting on the horses.

• Returns on investment: Some forms of borrowing for investment can wind up costing you more than you make. A return on investment (ROI) of 5% usually doesn’t stack up too well in comparison to a lending rate of 15%.

• Costs of loans and investments: Both the loan and the investment may have costs, hidden or otherwise, built in. These costs are real dollars going out the window. It’s a very good idea to check for any cost factors related to both elements of your investment, because these really are bottom line impacts.

• Loan insurance, collateral and related loan security issues: Many lenders will want coverage of their money up front. This adds a potentially tricky dimension to borrowing, and may involve commitment of assets you’d rather not commit. Remember, if the loan goes sour, you can lose these assets.

• Investment market environments: The fact is that the investment markets can rip value out of good investments as well as bad ones. The recent stock market roller coaster rides are a good example of some types of “market forces” which are best avoided.

The upside of borrowing to invest Gruesome as the risks are, the potential upside of investments can’t be discounted. It’s really a matter of balancing risks. Professional investors often borrow. It’s how you borrow which makes the difference. There are potentially major financial benefits out of borrowing to invest:

• High value returns on an easily managed loan: This is the classic successful scenario for borrowers. These loans are covered, usually by other investment assets within a profitable investment scheme and can’t become major risks.

• ‘Scaled’ borrowing routines: It’s quite possible to build up a good portfolio of investments in stages. The risks are kept strictly to defined dollar values well within the ability of borrowers to cover. This is a “belt and suspenders” approach to borrowing, and minimizes the potential for damage. You can also build up a good credit rating while you’re at it and take out cash loans to set yourself up. These are major benefits for future investment.

The bottom line is the only line worth looking at in any borrowing scenario. Manage risk, and you’ll manage your investments very well.