An investment loan can be an effective strategy for growing your wealth, if you’ve identified amazing assets to invest into but lack immediate funds to do so.
Opportunities abound in our markets these days, with many of them providing lucrative capital gains if you are able to grab the chance and put your money in at the right time.
But you may not always have excess money lying around that allows you to move quickly on the spotted opportunities, and therefore require an external source to provide the needed funds.
If you’re feeling confident about the investment opportunity and the returns that it will generate for you, borrowing money to finance the investment can be an effective way to have your cake and eat it.
What is an investment loan?
An investment loan is an unsecured loan that is provided for the specific purpose of investing into market assets such as shares, mutual funds, unit trusts and similar instruments.
To take up an investment loan, you would need to first have an investment account opened.
You can apply the loan for your own wealth accumulation purpose, or to start building a portfolio for your children.
How is an investment loan useful for your financial planning?
Proper use of debt can be a very powerful ally in your quest to accumulate wealth, the key word here being proper. One should never borrow money and jump into any investment without doing the necessary due diligence.
Nevertheless, borrowing money to invest can be beneficial in a number of ways:
Better cash flow
An investment loan can provide you with a better cash flow position because it provides immediate liquidity to your account. With the presence of additional funds, you do not have to sacrifice and liquidate any of your existing investments to finance new ones.
It takes money to make money. In some situations, a higher rate of return for your invested assets becomes available if you invest beyond a threshold amount.
Rather than wait till you’ve accumulated enough funds to top up on your investment and potentially let the opportunity slip you by, you can borrow money to further substantiate your investment and start realising a better return almost immediately.
This allows you to take advantage of the arbitrage spread between your rate of return and the interest rate for your loan.
Factors to consider before you take up an investment loan
Investment, especially in capital market instruments, is all above leverage. And leverage can work both for and against you.
Leverage creates a multiplier effect to the money that you’ve invested, which can substantially grow your capital gains. On the flip side, any loss is also magnified. You can lose 100% of your invested sum and with certain instruments (such as call and put options) even incur additional losses.
Don’t forget that while your capital gains may or may not materialise, your loan commitment is guaranteed and you have to service the loan regardless of whether you make money off your investment or not.
Check that the effective interest rate on your loan is manageable and that your net returns from the investment opportunity is still profitable after paying off your loan with interest.
You wouldn’t want to be caught in a situation where you end up making a loss from the whole arrangement.
Do note the repayment schedule of the investment loan and determine if it coincides comfortably with the expected payout cycle from your intended investment, or your regular income cycle, so that you can service the loan instalments without stress.
No investment opportunity is guaranteed and therefore, it is prudent to do your homework and make sure that you’re comfortable with the potential risks and rewards that come with your intended investment, as a negative outcome would result in you losing money and still have to service the borrowed funds.
When should you get an investment loan
Assuming that you’ve done your sums and are confident about:
- being able to generate your desired returns on the potential investment, and
- feel comfortable with being able to service the loan repayment
Then you ought to take up the loan sooner rather than later so that you can capitalise on the investment opportunity before it slips away.
Where can you apply for an investment loan
Typically, if you have a portfolio with a bank, that would be the first avenue to go to for getting an investment loan, as the bank would be familiar with your investment goals and needs.
However, sometimes that can work against you, as certain circumstances may influence the bank to be overly prudent in providing you the amount you need.
There are also situations where you prefer to have a separate investment relationship outside your usual banks, which necessitates borrowing from an alternative source.
Whatever the case may be, one of the easiest channels to get an investment loan from is via a licensed moneylender.
A money lender is more likely to offer you a customised loan structure that better reflects your financial situation than that of a bank’s.
Where to find the best investment loans
You can do a search on Google and go from one moneylender website to another and learn about the types of loans they offer, and the terms that come with those loans. You can also call them up one by one and ask.
A better and easier solution would be to use a quote aggregation platform such as Loanhere.
With a simple enquiry request, Loanhere will generate your customised loan quotes from a curated selection of the best licensed moneylenders in Singapore and email them straight to you almost instantly.
If you’re looking to apply for an investment loan, get a quote now.