How you can borrow money to invest
You might have been told about a ‘can’t-lose-investment,’ one that you simply have to get on board with as it is a guaranteed money spinner. It will double, triple, maybe even quadruple your investment within six months.
The only trouble is, you don’t have any funds to invest with. The well is currently dry on your personal finances and as a good an investment opportunity as this is, you simply don’t have the capital with which to get on board.
If this sounds familiar, then we’ve got the solution for you – borrow to invest. To some it sounds like a risky game, borrowing money from one source to invest in another. Yet investors across the world do it all the time. It’s called using leverage, and as long as your investment increases in value at a rate that is higher than the interest that you’re paying on the money borrowed, you are going to make a profit.
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Sound good? Then read on for our four ways in which you can borrow money to invest.
Take out a loan
In the past year, 34 percent of Americans have taken out a personal loan. That’s roughly 83.5 million who have turned to traditional money lenders such as banks or the latest wave of creditors that the internet has brought into the world.
Loans are one of the easiest ways to get hold of funds with which you can invest. There are a whole host of borrowing schemes for people with a whole host of different circumstances, ranging from loans specially designed for those with bad credit ratings to loans which are more suited to people on disability. You can refer to this page for more information on those.
The critical thing to remember when it comes to taking out a loan is the interest rate. This is determined by how much you want to borrow, the type of loan you are seeking, the terms of the loan and your credit score.
Those individuals with excellent credit can expect to find rates at about 10 to 12 percent. As long as the investment into which you are plowing your borrowed money is going to return more than the interest rate you are paying on the loan, then you could be on to make some serious money.
Borrow against your home
One alternative to borrowing unsecured money from a bank is accessing funds by securing your home against them – either through refinancing your mortgage or taking out a brand new one entirely.
There are many advantages to remortgaging your home in order to free up cash. You’ll be paying an interest rate much lower than that of a personal loan due to the fact that the lender has a valuable asset secured against the loan – your house. It can also be a quick and easy way to free up a huge amount of money, much more than is available through a personal loan, so if the investment is a solid one, you’ll be increasing your investing power significantly.
The crucial aspect of remortgaging your home to invest is that the investment has to cover the loan you’ve taken out, the related borrowing costs and interest and it needs to generate extra income on top of that to make it all worthwhile. You’ll, therefore, need to carry out some serious calculations before you commit to effectively putting your own home into an investment.
Because that is what you will be doing. If you can’t afford the repayments then not only are you putting your equity at risk, but you could end up losing your home as well.
Buy on margin
When you buy on margin, you borrow money from your investment firm to pay for part of your investments. This is a good way of increasing your spending power beyond what you can initially afford. You might only be able to invest in a low number of shares of a fledgling tech company that is meant to be the next big business, but by buying on margin, you can snap up more shares and potentially increase the return on your investment.
To buy on margin, you need to open a margin account. Your investment firm will then set a minimum amount of money that you must deposit into this account. From there, they’ll decide how much you can borrow, which could be up to 70 percent of the money you invest. Interest charges on the loan are applied to your account and the collateral is the stocks themselves.
While buying on the margin can offer big returns, a poor investment can leave you in a lot of trouble. Should you be unable to repay the money you’ve borrowed, the investment firm has the right to sell your stocks in order to try and recoup some of the money they’ve loaned out which can leave you out of pocket and with no shares of your own left.
Short sell stocks
One alternative to investing in a company that you think is going to do well is to invest in one which you think is likely to fail. This is known as short selling stock and it doesn’t involve borrowing money but borrowing stock.
If you think that a stock is going to fall, you can borrow shares in it from an investment firm and sell them at the current price. If the price of that stock drops, you can then buy them back at a lower price, return them to the investment firm and keep the money that you’ve made – the difference between the higher selling price and the lower buying price.
Sounds easy, doesn’t it? The problem is investing in the correct stock which is going to fall. If the share price goes up, you could find yourself having to pay out a significant amount of money from your own personal funds in order to buy the stock back and return it to the investment company. That’s the riskiest aspect of short selling stock – if you don’t get it right, it can be catastrophic for your finances.