Should You Borrow Money For Investments?

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Aside from staying healthy, keeping your finances robust is one of the greatest goals in surviving the pandemic. Although there are a lot of events that led to health and economic challenges, Filipinos are still positive they can get through it all. And one of the biggest questions to deal with is – should you borrow money to start an investment?

We understand that a lot of people are looking for more ways to earn money and having a job is not only the answer to this. Investing money into business, stocks, and other means to earn passive income is also a lucrative endeavor for many.

Interest vs gain

The primary consideration when deciding to apply for a personal loan to invest is comparing the cost of the loan against the gain from the investment. Logically, your investment profit should be higher than the costs incurred for the personal loan. That should include the interest rates, processing fees, and other charges imposed by the lender. If your loan interest is around 3-8% per month, your investment should earn at least twice as much.

The interests on loans are relatively higher than the returns you get mostly from low to moderate-risk investments. Unless you are betting on a business, it pays to work on the numbers before applying.

Setting which kind of investment you’re looking into will also help you decide which type of loan to take and up to how much money should you be loaning for. Not all investments are equal. Some high risks and volatile but may let you earn as high as 15%. Other forms of investment may allow you a very low profit but secure you from losing your money.

Types of investments

Since your loan venture highly depends on your investments, here are a few of the many options you can take:

  1. Stocks – Most common and most simple type of investment that lets you buy shares in a company that’s publicly traded.
  1. Bonds – Buying bonds means lending money to a business or government entity that can be held for a predetermined period. After maturity, you earn back the principal amount plus the determined interest.
  1. Mutual funds – A mutual fund is consist of money from a pool of investors which are invested in multiple companies. The mutual fund can be used to invest in stocks, bonds, or both.
  1. ETFs – Exchange Traded Funds are like mutual funds because ETFs are a collection of investments that are used to track a market index. ETFs are generally sold and bought on the stock markets.
  1. Options – Options are investments that allow you to buy and sell stocks at a definite price. Options provide you the freedom to decide whether to buy or sell the stock.
  1. Real estate – Buying a property is considered as a long-term investment considering that a lot of people are looking for a house or land to rent. How much and when can you earn from different types of properties if indefinite and will highly depend on market demands?
  1. Savings accounts – Saving money in a bank account is equal to lending your money to the bank at a low-interest rate. The returns are usually pretty low but people who opt to save through banks value the security and availability of their cash.
  1. Business– The money you put in starting and running a business is considered as an investment. Entrepreneurship requires more than just sufficient funding.

How to make it work

In general, most experts consider borrowing for investment as difficult because the money automatically comes with a cost. Choosing the right type of investment, however,  could compensate for the risks and the expenses entailed with the borrowed fund. Applying for a personal loan and investing the money in business can be more profitable compared to other forms of investments. Buying and selling goods online have proven to earn entrepreneurs a decent amount of cash, pay off their debts, and save for emergencies.

What to avoid when borrowing for business

A business loan or a personal loan can propel the growth of an enterprise when used properly. Avoid these mistakes and you will certainly gain from your borrowing efforts:

  1. Borrowing too little, or too much

Be very careful with the amount of money you will borrow. Borrowing too little may not help you achieve your business goals while borrowing too much will increase the risks of unnecessary spending. Create a business plan and a budget to include the financing forecast of the business. This will help you gauge how much money to spend and what aspects of the trade to cover.

  1. Immediate loan repayment

Many borrowers would want to become debt-free as soon as possible. When you borrowed for business, a longer loan tenor would help a lot in managing your cash flow. Instead of using the money to pay off the loan immediately, smart entrepreneurs would opt for longer tenors so they still have the cash to spend on business expansion.

  1. Focusing on interest rates

There are a lot of factors to consider when borrowing money. Aside from interest rates, you should also take into consideration the loan term, repayment amounts, and conditions of the loan. Focusing on the interest rates will not let you maximize the benefits of the loan. Some loan offers have relatively high interest but with easy repayment schemes. Check for terms that work best for you.

Final thoughts:

A personal loan is a privilege granted to deserving borrowers who have kept their credit profiles good by responsibly paying off their debts and dues. Once approved for a loan, plan out how this could be used. Compare investment and loan options before applying. We all know that the times are rough and it takes a strong fish to swim against the current. Don’t let the pandemic drag you down. Explore financial tools to help you improve your cash flow and survive the threats of recession.

 


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