We probably can agree on one thing – we won’t get filthy rich from our 9 to 5 day job. We need to use money to make more money. Can we get a loan with a 7% interest rate and use it to invest in the stock market? Of course, we can. However, that comes with certain risks. What if the average return from the market is less than 7% a year? What if the market takes a downturn? These are some of the factors we need to consider before we dive into it.
The more money you borrow, the greater the risk becomes because you have to repay the loan regardless of the performance of the investment.
- Investment income risk – The income from the investment may be lower than the loan costs. There may not be any return on investment if the market performs poorly.
- Income risk – What if the regular paycheck stops due to unforeseen sickness or injury? How do we manage to repay the loan?
- Capital risk – The value of the investment falls below the loan balance. Are there funds set aside to cover the loss and repay the loan?
My personal experience was I took out a personal loan from Capital One at 7.99%, plus a $50 fee per year for 5 years. The loan amount was $14,000.
I needed to make $1,200 give or take to break even per year.
I invested some of it in stocks and write covered calls, some in stock mutual funds, and some in high-yield bond funds.
Long story short, I made the monthly payment by using money from my regular paycheck. I wanted to keep the investment intact. In the end, 5 years later, I gained $14,000 in my account. Not bad.
Of course, it wasn’t something easy to do because I was under consistent stress. There is a reason why people say only invest the money you can afford to lose. The money was borrowed. I could not afford to lose. The stress level was intense.
I was also fortunate because nothing happened to my day job. The paycheck came every other week. I was healthy. Thank goodness.
Will I do it again? Probably.