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Should I borrow money to invest it? Team
UpdatedAug 16, 2010
Key Takeaways:
  • Borrowing money to invest it is known as leverage.
  • Leverage is a tactic best used by professional investors.
  • Do not invest what you cannot afford to lose.
  • Finding guaranteed investments paying more than 2.99% is tough today.

I am considering borrowing money at a low interest rate, and then investing the loan proceeds. Is this a good idea?

Should my husband and I take a $25,000 loan at 2.99% interest rate (for military personnel) and invest the money?

Borrowing money for the express purpose of making an investment should be left to Wall Street professionals who carefully follows market trends and know exactly what risk is involved in such transactions. In the trade, this is known as leverage, and consumers using leverage in investing is courting disaster.

For the average individual investor, there is simply too much risk in using leverage. The old maxim "don't invest money that you cannot afford to lose" actually becomes "don't invest money you can't afford to lose, and repay with interest." Not only could you lose the amount you intend to borrow, but you could be left paying back a loan, with interest, even though the money borrowed never provided you with any benefit.

Borrowing these funds to deposit into a "guaranteed" investment vehicle, such as a CD or high-yield savings account, would not be particularly risky, but you would probably lose money on such transaction, since the interest rates being paid on such accounts are currently less than the 2.99% you would be paying on the borrowed money.

However, if you do know of a guaranteed investment that pays more than 2.99%, then borrowing the money from the government to, in effect, loan it to someone else where you would be guaranteed a higher return would be a smart move. The challenge is finding such a guaranteed investment today because I do not think they exist. I would be extremely surprised if you can find any guaranteed return that exceeds the 2.99% by a large enough margin to make such borrowing and reinvesting these funds worth the time and effort required to make it happen.

I hope this information helps you Find. Learn & Save.