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Taking out a loan to invest: What you should know - YouTube
Channel: Syga Thomas
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- Hey guys, it's Syga
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and welcome back to my YouTube channel.
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Now, happy Friday.
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And as we get off into the weekend,
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let me throw this scenario at you.
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Imagine you'd come to
me and say, "Hey, Syga,
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I wanna borrow $5,000."
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And I say, "Sure, I'll lend you the $5,000
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but I'm gonna charge you 6% interest."
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And then you do a quick calculation.
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You say, "Well, that works for me
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because my plan is to take that money
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and invest it in the stock market.
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And I think I'm gonna make enough money
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to where I could pay you
back and make some too."
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Well, guess what?
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That's the dilemma for a
lot of people out there
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especially when they have no cash.
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It's really, really tempting
to take out a personal loan
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and invest it into the stock market
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or some other investment,
but there comes risk.
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So in today's video, I'm
gonna sort of go over
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what it's like to take out a personal loan
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to invest in the stock market.
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What are the advantages and disadvantages
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of doing so, and more importantly
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I'm gonna reveal the rare circumstances
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where it does make sense to
embark in such an endeavor.
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If you think that this is something
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that interests you, hit the like button,
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subscribe to my channel
and let's get started.
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(upbeat music)
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So let's talk a little
bit about personal loans.
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Personal loans are unsecured debt.
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That means a lender can't
take back a house or a car
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if you default on your loan.
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However, these types of
loans, unsecured loans,
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typically come with higher interest rates.
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And why is that?
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Well, guess what?
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That lender again, doesn't have anything
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that they can go after if you default.
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Personal loans are fixed term loans.
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And what does that mean?
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You have a certain
amount of months or years
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to pay back the entirety of that loan.
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And that's gonna be based
on the interest rate
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and the terms in which you agreed to.
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Now, why is that important?
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Well, let's take an example.
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Credit cards, a lot of people
simply pay the minimum payment
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that's due every month
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and they just simply carry the balance
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until they're comfortable
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or they're in a financial
position to pay off
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the entirety of their credit card.
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Well, guess what?
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That's not gonna happen
with the personal loan.
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With the personal loan,
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you're gonna have a set amount
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that you must pay back every month.
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Now, why is that really important?
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Well, guess what?
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If your plan is to use this personal loan
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to invest in the stock market,
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you're gonna have to set
aside a sizable chunk
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just to pay back the fees
that are due every month.
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That's where it becomes really tricky.
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You must be careful.
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Not everyone is set up to succeed.
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A lot of you might be wondering
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am I even allowed to use a personal loan
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to invest in the stock
market or another investment?
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Generally speaking, you can.
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That's unless you've
agreed with your lender
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prior to using that personal
loan to, for example,
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pay down your debt where
you might've been able to
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receive a lower interest rate
for that specific reason.
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Otherwise you're able
to use a personal loan
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for whatever reason you want.
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That being said, I would speak
to your lender beforehand
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just to make sure there's no language
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in your contractual obligations
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where you would be penalized for doing so.
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And I know a lot of you might be wondering
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why the hell would I use
a personal loan to invest
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in the stock market?
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- [Man] What the hell?
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- Either I had the cash or I don't,
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But guess not, that's not the way
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the majority of people think.
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A lot of people don't have the cash
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and they believe, especially
in this market climate,
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that they can take out a personal loan
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at a certain interest rate
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and they're gonna make more money
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in either the stock market or for example,
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one of the cryptocurrencies
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or something else where they
know that they'll have enough
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to pay back that loan and come out on top.
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And again, it's very, very risky
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but there is some
credibility to the notion
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that if you do it well and do it right,
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and you plan out, you're
able to pay back the loan
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and make money on top of that.
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So in the beginning of the video,
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I gave an example of giving a loan
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at an interest rate of 6%.
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But in all likelihood,
the real market rate
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for personal loan unsecured
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would probably be around 11 or 12%.
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So if you're gonna take
out a personal loan
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to invest in the stock market
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or some other type of investment,
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you need to make sure that your returns
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are gonna be somewhere around 11 or 12%
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at the very minimum.
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And I think that's really, really close.
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The margin for error is just too risky.
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If I'm gonna take out a personal loan
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to invest in the stock market,
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I wanna see my returns
to be 15% or even 20%.
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And that's very difficult to guarantee,
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especially in this volatile market,
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like the one we're seeing today.
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I would prefer to invest
in like a small company,
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where you have greater control,
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or there's a history where
you can really track and know
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that, hey, if I take this
money out and borrow 11%,
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I know I'm gonna see
returns at around 20%.
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Let me go into detail in
terms of why I think investing
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into the stock market
or any other investment
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with the personal loan is
just simply a bad idea.
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- [Man] Oh, no.
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- The first thing is that
personal loans have fixed terms.
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Now, why does is applicable for you?
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Well, if you have a fixed term,
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it means that typically
between three and seven years,
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you must repay that loan.
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Well, guess what?
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In investments, as we all know,
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your returns vary from year to year.
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And most times you're not
gonna see the true return
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in only three years.
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It's gonna take seven to even 10 years
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at least to equate what you
can see in the stock market.
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But with the fixed term loan,
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you can't wait for that seven to 10 years.
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You have a certain amount of
time where you must repay.
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The second aspect in terms
of why a personal loan
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is a bad idea when it comes
to investing the stock market
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is simply the interest rate.
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Your interest rate is gonna
be really, really high.
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Like I said, you're gonna typically see
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between 10 and 12% and
it could even be higher.
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And that's nowhere near what you're seeing
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with a mortgage or a car
or even debt consolidation
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where your interest rate
can be from three to 6%.
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Then the very last
aspect of why they're bad
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is because you have to make
monthly payments no matter what.
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So if your stock that you've
invested in or your portfolio
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or whatever, small
business is performing bad,
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no matter what you got to take
a chunk out of your returns
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just to pay back your monthly
payment on your personal loan.
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And that's gonna end up
reducing the overall value
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of your investment, but guess what?
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That's how they work.
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And so you really have no alternative.
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You're not gonna be able
to go back to the lender
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and say, for example, guess what?
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This month I can't pay.
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Can I make a small payment?
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Guess what?
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They're gonna say, get out of here.
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So you have to really be careful
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if you're gonna go down this route.
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Let me give you a real life example
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of how this would work in practice.
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Imagine that I take out a loan
for $10,000 at 12% interest.
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And I invested in a company.
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And that company sees a 15% return
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on that money in the first year.
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And I think, wow, I hit the jackpot.
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That 3% difference is
what I'm gonna pocket.
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But guess what?
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It really isn't.
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- [Man] Psych!
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- First of all, the
interest that I'm paying
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on that personal loan
is not tax deductible
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like it's a house.
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So the capital gains that I'm making,
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I'm gonna be taxed on that money.
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And guess what?
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I didn't even count the fact
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that I still have to make monthly payments
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on the loan itself.
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And so that's gonna further
reduce what I'm making.
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And that's just for a large investment.
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Now let's take a look at the stock market.
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As we know the stock market,
the global stock market
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or even the U.S. stock market
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typically sees returns
between eight to 12%.
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Let's just take that as a
white band, but guess what?
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That doesn't make sense
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because I'm borrowing the money at 12%.
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So I would never borrow money at 12%
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to then only make back
between eight to 12%.
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So that totally goes out the window.
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And that's why I said,
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it's gonna be the very rare, rare case
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where there truly is no risk
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or it's a guaranteed return on money.
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And where you would say
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I'm gonna take out personal
loan, but guess what?
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I can't even come up with a scenario
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where anything's ever guaranteed.
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At the end of the day,
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you have to make the determination
on what's best for you.
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If you have no money,
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it's not necessarily
always the best idea to say
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I'm gonna sort of speed up
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and I'm gonna avoid having to save money
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and get into the right position.
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And I want to make that quick money now
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because you can go down a rabbit hole
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and there's no coming out.
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So as always, when you think
about your investments,
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please look at the different scenarios,
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the different options that
you have for investing.
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It's not always about how
can I make that quick money
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because you might end up owing more money
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than you even borrowed.
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And that's no position that
any of us want to be in.
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Take it slow, you'll
get there at some point.
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As always, I hope you
enjoyed today's video.
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The stock market is hot.
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I know people are really excited
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and want to join in or
jump in at the opportunity,
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but be careful about it.
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Be diligent, do the work that's necessary.
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Look, leave some comments below
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if you have any questions
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or you've taken out a
personal loan in the past
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to invest in the stock
market and you've done well.
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I'd love to hear about it.
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And I certainly will respond.
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Make sure to hit that like button,
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follow me on Instagram, investlikesyga,
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I leave cool tips on investing,
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in real estate, and
personal finance as well.
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And until next time, thank you.
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(upbeat music)
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