Tuesday, April 8, 2008

Borrowing cheaply to fund investments - Pt. 1

Yesterday I talked about the possibility of using the cheap loans banks have been offering to fund investments. Based on an offer of $8,500 for either a 6-month loan at 0.99% or a forever loan at 6%, with a 3% fee on each, here are the numbers:

Instead of accounting for the "forever" loan, I just assumed a 36-month loan. Taking into consideration the interest rate and fees, choice 1 is clearly the lower costing loan.

However, just because the dollar cost is lower doesn't mean it is actually better. The 36-month lower has a lower required return rate of 4.25% compared to a return rate of 6.78% for the 6-month loan. Risk is increased greatly whenever higher returns are required in a shortened time frame.

While either return rate is doable in a normal stock market, given the current economic environment, I am leaning toward a longer time horizon. The smaller per month payment also allows me to payout of my pocket earlier on, before I've started generating any real investment income.

Tomorrow, I will work out what I need to make in order to make this venture worthwhile.


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Rachel @ Master Your Card said...

This is an interesting idea. I do think that key thing to consider before you start is your self discipline. Make sure that you will not be tempted to spend the money that you have borrowed on other things. I am sure youwill be convinced at the start that you will not touch the money but what if you need money in an emergency, make sure that you have an emergency fund to help you out.

Anonymous said...

Could you please show the required minimum rate of return for your investment choice now including both long and short term state and federal taxes? Could you also show the added costs of your brokerage house of choice to execute your trades. I would be interested to see how the minimum ROI changes based on this reality.