Loans or investment which should be first
Recently I have been learning a lot about loans and investments. I have been exploring some investment opportunities and have also planned to take some loans. This is why I started exploring whether it is good to go for further investments or finish off the loan first. In India, loans work differently and the interest rates are also comparatively high. I'm not sure about the other countries but most of the loans start with paying high interest at first and paying back the principal starts only after a later point. For someone trying to pay back their Home loan would end up paying heavy interest first.
I used to wonder that if we are able to get a decent investment opportunity, should we grab that or finish off an existing loan first? After consulting a lot of investors and big financial people, I was able to learn that finishing off a loan is always the best thing because this way we can save a lot of money than paying unnecessary interest to banks. One good thing about loans is that we are able to save some time and purchase a property at the right time. If we are lucky the property value might appreciate and we might end up selling it to someone else at a later point in time getting a very good amount of money at a later point in time.
Emergency fund is a consideration
When paying off the debt, considering emergency funding is an important thing. We have to keep enough reserves for emergency funds. If we have emptied the emergency funds and made the investment, then the first focus should be on getting the emergency funds filled up again. After it is ready, we can focus on paying back the loans. Keeping some funds aside for emergencies is the most important thing. Some people also think about taking term insurance if they plan on making a huge investment. This way people are able to not leave any debt behind after their life is over.
Taking loans to invest
This is a strategy some people usually follow. Mostly this is done by people who are young and have many more years to earn. This is mostly avoided by people who are close to retirement in order to not take any risks. I personally have done this several years back. I wanted to explore the stock market and most of my investment went inside the stock market after I took a personal loan. I was very confident that I would be able to make some profit out of it but still, the risk I was taking was huge and thankfully I was able to clear my debt as well as get my investment back in the form of some decent returns from the stock market as well.
They say that mutual funds are low-risk investments and they are safe compared to stock market investments. But in general, I would say that taking a loan and doing an investment with that is a huge risk and we have to calculate the APR it would be giving us back. If the interest is going to be huge and if we don't make enough money with the money we got from the Loan, then it is a bad investment. People say mutual funds are good and low risk but again, it can vary based on several factors and especially market conditions are the most important thing that can tilt our investment value upside down.
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Getting a loan to invest is not bad though the risk is 50/50 in future returns, that is if you have confidence that the gain will be massive but what is life without taking risks anyway
Yeah risks can be good during the young age but not when someone is close to the age of retirement.
I would like to say here that if a person is absolutely sure that he will go into profit, then he should do it in this way, otherwise, a person may suffer a loss and then later there will be a lot of trouble, which is what a person has done. The bank takes what is given to the bank.
Yeah the bank never feels pity for someone if they make mistakes. So being very careful is important.
A person has to take care of himself and his property.
I don't know if you have similar products, one thing I did was invest in low-volatility securities, income funds, to park my savings. This way I would still earn interest. Then, my broker allows borrowing up to 50% of the value of my investment via margin loans. In this way, I can grow my savings, which also results in growing my credit. The margin interest is lower than bank loans. And the margin loan does not have to be paid back on a fixed schedule.
The reason I chose a bond fund rather than exciting stocks was to lower the risk of a margin call. If I wanted some upside exposure, I might consider adding 10% in stocks. But I'd have to rebalance the allocation periodically to reduce my margin risk.
In other words, you can have both.
Yeah well said. We can have both only if we are clear on what we are doing.
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I know a person who take loan and invest that money and he is pretty successful by the way.
Yes I know a few people doing that too. Sometimes we can also get unlucky. It is like playing with fire.