Investment loans are simply money you borrow to earn more on your investments. They make sense when the return on investment of the loan is high and the risk level of the investment is low.
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Is it advisable to borrow money to invest?
Borrowing to invest can be an effective way to boost your potential returns. It is called using leverage. A way to increase the value of your investment by using borrowed money. The more you invest, the more money you can make.
As an investor, you’re probably already well-aware of the simple fact that having more money often means larger returns. Like most traders, there’s probably been times where you’ve seen a great investment opportunity but didn’t have enough capital to make it worth your while.
Having enough funds at your disposal when trading is crucial to realizing your true potential as a trader. That’s why investment loans can be a great option for some. This is where you would basically invest with borrowed money and then pay back what you borrowed while pocketing any profits you made.
Rates for Investment Loans
The interest rate you will pay for an investment loan can vary widely. You have to consider the difference between the loan rate and a reasonable return on the investment you use the investment loan for. Check with LoanConnect for the best rates.
Of course, there’s often interest or other fees that you need to take into consideration when doing this, but it can still be incredibly profitable when executed wisely. So if you’re curious about how you would go about doing this, here are the different types of loans you can use and the advantages of investing this way.
You can use an investment loan to buy stocks, futures and other financial instruments.
Ways to Borrow for Investments:
Home Equity Loans – Shop for a Mortgage
If you own a home and have paid mortgage payments, you’ll normally be able to open an equity line of credit or a home equity loan. These two types of loans both involve borrowing money that is backed by the value of what you’ve already paid into your home. An equity line of credit works similar to how a credit card works. You’re given a form of credit that you can access at any time when you need it.
Interest rates on equity lines of credit can be variable and change over time. A home equity loan, on the other hand, is normally a one-time payment and often has fixed interest rates attached to it which don’t change over time.
However, one downside of home equity loans is that there are sometimes other costs associated with them such as closing costs and other fees.
But the good news is that with both of these loan types, interest rates can be extremely low compared to other types of loans because it’s based on the equity you’ve already paid on your home.
Margin Accounts
Nowadays, most brokerage firms in Canada offer margin accounts to their qualified customers. This is where you can ask the company you trade through if they will loan you money to trade with. If approved, they will put extra money in your account specifically for trading with.
The amount they loan you is normally based on the amount of cash you’ve already personally added to your account. Other factors such as your credit history will often be a factor as well.
In order to borrow money using a margin account, you’ll normally have to pay interest on the amount you borrow. The interest rate can differ based on many factors and is almost always an annual rate.
Personal Loans
You can also apply to take out a personal loan through banks, credit unions, or any other financial companies that offer these. Personal loans are known for having high interest rates though, particularly for those who have less credit history or low credit scores. Apply Here and Compare Investment Loan Offers
When borrowing to invest this way, you should ask the loan officer that you speak to about all your options and what the interest rates might be. One advantage of taking out these types of loans is that the amount of time you have to repay them can often be many years and extended for even longer periods when need be.
Short Selling
While short selling doesn’t involve borrowing any money, it’s a type of loan that traders can and do profit from every day. While you can short sell many different types of securities, this is most commonly done with stocks.
When you short sell a stock, you borrow a certain number of shares of that stock from your brokerage firm. You do this when you expect the value of the share price to decrease or drop over time. After the brokerage firm loans you the shares, you then sell them to somebody else. Once the share value of the stock decreases, you buy the shares back at a cheaper price than what you previously sold them for.
You’ve now made a profit between the difference and can return the shares to the brokerage firm. This can be extremely profitable, minus any interest fees, if you are correct in predicting that a stock will decrease in value. However, it can also be very risky if you’re wrong and the stock’s value increases instead.
Benefits of Investment Loans:
Maximized Compound Returns
One of the biggest advantages of borrowing to invest is the fact that compound returns are amplified. If you’re unfamiliar with the concept of compounding returns, it’s basically when you take the profits made from an investment and reinvest them to make even more profits.
Think of each reinvestment as a point that you reach after a period or cycle of investment. Every time you go through one of these investment cycles and you reach a point of profitability, you have much more to invest in the next cycle or period. Thus, you’ll make much greater returns each time by the end of that cycle. This allows you to reach your goals much more quickly because you’re starting with more capital which increases your potential for seeing larger returns.
Pounce on Opportunities
Another plus when you invest with borrowed money is that you can be in a better position to capitalize on opportunities when they arise. If you already have your money invested in something, you might not have any free cash to trade with when you see a new investment opportunity.
As an example, when the COVID-19 pandemic first hit the Toronto Stock Exchange, stocks plummeted and investors had little time to react. Many then saw a unique opportunity to invest in the stocks that they believed had bottomed out. But because their funds were already invested elsewhere, they had to sit on the sidelines and miss out on what otherwise could’ve been a very profitable scenario for them.
Tax Benefits
There are also tax benefits that Canadians can take advantage of when earning investment income from loaned money. For example, if you are paying interest on the money loaned to you, most of the time you’ll be able to deduct that interest from any gains you’ve made. Yes, you read that correctly. Your loan insurance payments, the one thing that can make borrowing money costly, can normally be written off when it’s tax time.
In addition to this, you should also keep in mind that most Canadians only pay capital income tax on 50% of our investment returns. This further reduces your liabilities and makes trading with loaned money that much more attractive.
Dividends Used Towards Interest
As a final note, one strategy that many borrowers use is to invest in stocks that have a high dividend payout rate. By doing this, you can potentially offset the cost of interest on a loan by making a greater amount from the dividends paid out to you.
This, of course, requires careful selection of your stocks as you’ll want to choose companies that are consistent with generous dividends and preferably with share values that have the potential to increase over time.
