Blog Borrow Where to borrow money to invest – And should you?

Where to borrow money to invest – And should you?

date September 18, 2020 time 4 min read 601 views

We’ve all wanted to make an exciting investment before. But often the idea of touching our hard-earned savings is too much to bear. While very risky, choosing to borrow money to invest can be a strategic method for meeting your financial goals.

Should I borrow money to invest?

Sometimes the best investments seem out of reach for an ordinary person. Want to buy a house? You need $100,000 in your pocket. Want to start a business? You may need even more.

But you don’t need to have all that money on hand to start that next step on your financial journey. There are a growing number of places that let you borrow money to invest, and give you reasonable repayment plans too.

This process, often called “leverage” is an advanced method investors use for netting higher profits. And it can come with sizeable risks.

There are a few things that can determine whether or not borrowing money to invest in is the right move for you. Below are the biggest pros and cons that you need to think through before finalizing your decision.

Should I borrow money to invest? (source: littleloans.co.za)

Pros of borrowing money for investment

You can make larger investments

Those who take a no-debt strategy for investments are bound by the financial constraints of their current wealth. You’ll likely have to pass on potentially profitable investments that come your way if you don’t have enough money in the bank to get involved.

Borrowing increases your range of investment. The risk is intensified when you invest with borrowed money, but with the right investment, you could also reap the benefits of higher yield. Essentially, you can borrow money to make money.

Save your shares

If you hold stocks or cryptocurrency for investment, you’ve probably seen a company or coin poised for growth and wanted to grab a piece of the pie without dumping your stock. Instead of selling off shares, you could instead buy up with a loan. Quite a few lenders offer loans against your cryptos or your shares today.

There are a lot of risks involved when you borrow money to invest (especially if your current shares are used as collateral). One unpredicted swing of the market could be all it takes for you to default on the loan and lose a lot of money.

Cons of borrowing to invest

You may jeopardize your credit score

Despite what your drinking buddies might say, your credit score is worth caring about. It helps you get loans approved quickly, provides access to low-interest rates, and opens the path towards higher limits at large financial institutions.

Taking out a loan to invest and then being unable to repay the debt on time due to a poor ROI, then your credit score will suffer. This could make it harder to borrow money to invest in the future — which is why timing is everything if you decide to take on debt.

High interest rates

While you can get spectacular ROIs when you borrow money to invest, you must remember your return is lower due to the debt you take on. High-interest rates could negate the impressive growth rate of any investment that you make.

For instance, if you buy a stock that appreciates by 10%, but the debt used to buy shares in it has an interest rate of 9.41% (the national average), then your net profit is less than a percent. You’ve still built credit, but are these marginal returns really worth the risk if things go south?

The best way to get a personal loan to invest

If you’ve decided that the potential reward outweighs the risks, then it’s time for you to pick which method suits your needs. Banks, credit unions, and Peer to Peer platforms are the most common ways people borrow money to invest, so we’ll focus on those three.

Banks

Interest rates from bank loans are usually below 10% (with anything beyond considered high), but there are many strategies you can use to get lower rates. Having an account with the bank in question and a good credit score usually helps.

Default risks:  If you default you could dramatically reduce your credit score lowering the chance of future loan approvals, and the hassle of debt collection agencies.

Bad Credit means trouble getting a loan
Bad Credit means trouble getting a loan (source: badcredit.org)

Credit unions

Many investors go to credit unions due to their lower interest rates, with the average sitting at around 5%. Some of the cons of credit unions include fewer branch locations, stringent membership requirements, and occasional branches that lack insurance.

Default risks: Credit unions share many of the same risks that occur when you default on a bank loan.

Peer to Peer (P2P) platforms

Also known as crowdlending, P2P has become a favorite alternative due to its frequently sub-5% interest rates, six-figure caps, and flexible terms. Most sites recommend you have a credit score of 600 or greater.

They also accept a wider range of collateral like cryptocurrencies. Many even get a loan to invest in cryptocurrency which is an inverted yet still viable strategy.

Default risks: while you may still have to deal with debt collectors, defaulting on a P2P loan is usually less stressful than through banks. Many platforms offer reasonable repayment terms even to delayed borrowers and failure to repay may not have as great an impact on your credit score.

Loans can help you invest, but only get into debt over amounts you can repay

It’s no secret that debt is a crucial step on the path towards financial freedom. Even the richest among us offset their tax liability through mortgages when they could easily buy everything in cash.

However, don’t bite off more than you can chew or you could find yourself in hot water. No amount of financial gain is worth years of debt.

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At MyConstant, we offer crypto-backed P2P loans for over 76+ different cryptocurrencies as well as trading services within our platform. If you want to free up the USD value of your funds for further investment in other exciting projects, your loan can be completed in minutes. And you can withdraw in either crypto or fiat with rates as low as 6% APR!

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George Schooling

George Schooling

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