Investing with a loan

[Jasmine]

You may obtain a loan to purchase a property, purchase equity, or investing in the stock market, or even mutual funds. If the market is favorable, your property prices will go up and in the mean time you make rental income, likewise, you earn dividends on your stocks, or get return on your investment from your equity or mutual fund investment. You use your profits to repay your loan.

Assume that you borrowed money at an interest rate of 10 percent and used the money to invest in the stock market. You calculated that you will be earning 12 percent return on your investment, or at least 10 percent return that you can use to pay your loan. But what if it never happened? For example, banks can raise the interest rate, or the market might fall and you might no be receiving as much money as you need to pay back your loan. You will be paying more money for loan repayment than you are earning from investment.

 

[Mika]

People get a loan for various purposes, for personal needs such as paying for education, medical bills, and house renovation; to buy an asset such as a house, or make an investment, for example buying stocks, or investing in a business. No matter what reasons people have for the loan, the basic purpose of getting a loan is to buy assets or make an investment so that you make more money. When you are able to earn more on your investment compared to the interest payable to your bank, the purpose of getting a loan will be fulfilled. However, this calculation frequently fails, and people end up paying higher interest on loans compared to the money they receive from their investments. When you decide to get a loan it should always be for investment, business, or buying assets. However, you need to calculate whether you are getting more returns or not.