InvestorQ : Is it a good idea to make an investment by taking a loan or debt at higher interest rates?
Khushi Patel made post

Is it a good idea to make an investment by taking a loan or debt at higher interest rates?

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nishi Shah answered.
8 months ago


Well, let me break it for you, but it’s a big “No”. Now, let me explain the reason behind saying a direct No rather than telling its repercussions and then asking you to avoid taking debt.

The math of Debt: The math of debt is very simple to understand, the more you borrow, the more it gets and if it is hard for you to stop early, it becomes impossible later. This situation in economics is termed as debt spiral, where an individual, business or company sees only ever-increasing levels of debt. It becomes difficult for the borrower to sustain these increasing levels of debt and interest, eventually leading to a default in repayment of debt.

Once Ben Franklin said that “Rather go to bed supperless, than the rise in debt”. So, taking debt has never done any good to any individual. When you spend more than you earn, that means you are unable to manage your funds and then you borrow to fill the gap. However, when you again receive your income, you pay most of it to repay the interest and principal of the loan taken by you. And this cycle continues, you lose track of your finances and then it becomes a disaster for. Now, if you see how debt affects your daily life, is it really beneficial to borrow for investment?

Well, borrowing money for investment means making the effect of compounding work against you rather than in favor. Suppose, if you take debt and are supposed to pay interest of 14%, and you invest it in a plan that fetches only 12% returns. Now, that extra 2% shall be from your pocket. This entire arrangement doesn’t make sense as you end up paying more and receiving nothing in return.

However, it is sometimes advisable to borrow money for investment, if the interest rates to be paid on the loan are lesser than the returns on investment but there has to be a substantial gap in both the amounts, to make it sound profitable. So, all your efforts would convert into profits.


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Sudharsan answered.
8 months ago


No ,investment should befrom savings.

Do not take any debt to invest, instead the amount of emi you are planning to payfor thedebt can converted as sip. I mean start a SIP affordable to you.

Thanks

NB : Ansered from my limited reading