Most investors invest the money they save, but sometimes they also take out a loan to invest. An investment loan helps you to buy larger units for which your own savings are not enough. This is more common in expensive investments, such as real estate investments or investing in a new business. Even buying a new home with a loan is basically investing in a loan, although few people think so. When, then, is an investment loan justified, and do the returns on the investment really help cover the cost of the loan?
When is an Investment Loan Profitable?
Obtaining an investment loan is the most realistic and easiest way to invest in a home. When investing in a property, it is easier to get a loan because the loan is secured by the property itself, and in addition, the homeowner does not have to pay taxes when selling the apartment if he lives in the apartment for at least two years. You can also rent a home for a steady income that can pay off your loan and make a little profit.
It may also be easier to get a loan to invest in your own company than, for example, stock trading. So if you or your acquaintances have a gold business idea, a loan can help you get started faster.
However, in practice, the idea behind an investment loan is that the investment made with the debt generates more return than the interest on the loan, or that the rise in the share price exceeds the cost of the loan, so that the cost of the loan can be covered by this increase. In principle, the idea is profitable. The same loan money used to buy a new car could be used for shares. The value of a car drips quickly, while diversified investments usually increase in value over time.
However, it may be bad for an investor if all the money is invested in a company of friends or another individual destination as the market tends to fluctuate. Before you take on debt, it is a good idea to read carefully about investing, for example, by reading books and articles online. Familiarizing gives you a perspective that makes it easier to make good decisions and take a critical look at investments.
If you already have many other loans, an investment loan may not be a good option even then. The return on investment is slow, so it does not help pay off other loans, and the loan may not be repaid particularly fast. Especially in this situation, it is worth avoiding larger loans.
How do I use the leverage?
Debt investing has its own nicks to keep it safe. There are many variables; investments can be negative, returns can be time consuming and investment diversification may be poor. If the reference interest rate of a loan rises, a company’s dividends are not paid, or its own income collapses, the situation can lead to financial disaster.
The key is to properly diversify your investments . The majority of investors do not diversify their investments sufficiently, which results in higher risks. You can even take on debt for the stock trade, but it is not a good idea if you do not have an investment strategy or investment experience. Experience can be gained even with small investments. The earnings from stock trading may be higher, but the risks are also generally higher.
In addition to needing investment information, you also need loan information. So, make sure you read the loan repayment terms and conditions carefully when making a loan. That way, you know what the limits and possibilities of a loan are. In particular, read the terms and conditions of repayment; whether free months are possible, whether the loan can be paid off in advance without any charges, etc.
Investments can be spread across stocks, funds, ETFs, real estate, forests and even peer-to-peer loans . Most secure investments are slow to produce, so you may have to pay off your loan first with your own money. However, over time, the return on investment may cover the cost of the loan.
It is not a good idea to invest in high-risk items such as warrants or gold with fluctuating value. Long-term investments are the most solid way to invest in loan money, and for this reason, investing with loan money is popular with, for example, value investors, investors looking for and investing in undervalued companies. There are many ways to determine the true value of a company, but the purpose of a value investment is to invest in the company before their true value reaches the market price.
It would also be good for an investor to have an emergency fund. If you become unemployed and your investments go badly, without the emergency fund, the situation can quickly become critical. Indeed, many investors hold cash for investments, and this cash also helps in a situation where your own investments cannot be converted into cash and no money is available.
Also, investing with loan money is not a good idea when you have a large mortgage loan, most of which is still outstanding. However, the risks are much lower if the mortgage is paid off or you are renting and you can consider an investment loan by comparing it to your net worth.
Here’s how to apply for a loan
There are no instant loans for investing, but you should look for the best possible loan on favorable terms. A quick loan may seem like an attractive lever to start investing in because it allows you to get a small loan quickly and repay it in small installments over a long period of time. However, this arrangement is often unfavorable for investment because of the high interest rates on instant loans and the high costs associated with long-term instant loans. In addition, the terms of a long-term instant loan may prohibit the advance payment of the loan.
It is also expensive to invest with credit or flexible credit. Flexibility loans can bring you between 2,000 and 15,000 dollars, which is an attractive start-up investment, but often the interest on your credit accounts is expensive. If you already have a credit account and are considering using one, you might want to check the terms and conditions and compare, for example, with a loan comparison.
A consumer credit or bank loan may be a cheaper alternative to an investment loan. In order to get a loan, your credit history must be in order. Smaller loans may not even be used, but larger loans may even require collateral or guarantors. Loans can be sought from banks and financial companies; the easiest way to compare prices is through the web. On the other hand, your own bank can offer a very affordable loan to a long-term customer with a good credit history.
Some loans have specific uses and cannot be used for anything other than a specific offer. This must be checked against the terms of the loan, for example, even if the title of the loan is a car loan, it may be open for use. If your bank offers loans for specific purposes, you may want to look elsewhere or even consider changing your bank. Investment loans are still a relatively unfamiliar concept in Finland and applying for one can get the bank to give a high price for the loan. So it is generally better not to tell you what the loan is needed for, unless you are forced to. The smaller the loan you take, the less the use will matter to the bank.
When applying for a larger loan, it may be necessary to provide security for the loan, such as your own home. Equities can also act as collateral. Their collateral value is determined by the risk level of the investment and the bank. However, in most cases the value of equity investments as collateral is lower than the value of the funds. However, this requires that you already own shares that are used as collateral. For example, if you are saving for your retirement and pension investments are your only investment, think carefully about whether you are willing to risk them.
In addition to the purpose of the loan, you should check the loan costs. Check to which reference rate the loan is tied and what its withdrawal fee is. It is definitely worth the margins to compete. Low costs are the key to investing in loan money, so you should not rush or miss a comparison.
It may also be possible to obtain a consumer credit that can be increased in the future if you wish. You should only grasp this if you already have more investment experience. Interest expenditure can sometimes be tax deductible; this is worth checking with the tax office.