Borrowing to Invest
Borrowing to invest, also known as leveraging, can help grow your money, but it can also lead to larger losses.
Leverage can work in many different ways, such as taking a loan from a bank or lending institution, or borrowing money through a brokerage firm, also known as buying on margin. Leveraging only works when the rate of return is higher than the interest rate on the debt, and it can be very risky if your investments don’t move the way you expect them to.
For example, if you choose to use the equity in your home to secure this loan and the investment doesn’t work out, you may have to sell your home to pay back the loan. Or, if the investment is used as collateral for the loan and it drops in value, you still have to make payments and you may be required to provide additional collateral to make up the difference.
Is it right for me?
Be sure to fully understand the real cost of borrowing and the risks. Have a back-up plan to cover losses in case your investments don’t work out because you will have to put more of your own money into the account if the investment loses money. If you are not comfortable taking on this risk, talk to a financial advisor about other ways you can invest to help meet your goals.
Leveraging may not be appropriate for investors who:
- Have indicated they have limited investment knowledge
- Have low risk tolerance
- Are retired or nearing retirement
- Will need to access the money in less than 5 years
- Would have debt payments higher than 35% of their gross income
- Have or would have a debt load greater than 30% of their net worth