Pondering over acquiring a loan for investment? Here's some essential intel you should consider.
Going over my personal finances yearly was an eye-opener, leading me to a prospect suggested by a financial advisor – an insurance policy with high returns, but demanding premiums beyond my budget.
His suggestion? Leverage a loan with a lower interest rate than the potential returns on the policy. While intriguing, this idea was initially overwhelming given my upbringing where debt was always considered a red flag by my parents. I had been warned about the dangers of not managing loans properly, often leading to a downward spiral.
However, I started questioning my fear of debt. Could I be missing out on opportunities by shying away from pressing the right buttons? It appears that strategic use of credit, like this potential loan, can be advantageous, but only if managed responsibly.
DEBATE ON GOOD DEBT AND BAD DEBT
According to financial experts, debt can be classified as either "healthy" or "unhealthy". Mr Lawrence Tan, a senior manager at the Institute for Financial Literacy, shared that debt meant to cover basic needs, such as education and housing, or to generate income through business startups, falls under the healthy category.
On the other hand, debt for unnecessary spent, such as lifestyle expenses, or extravagant purchases, can create financial chaos. The nature of debt is also influenced by individual income and the total amount owed – the ideal debt servicing ratio should be below 35%.
Whether debt is considered good or bad hinges on multiple factors, including the reason for borrowing, the loan amount, and the individual's financial health.
LOANS AND INVESTMENTS: A DELICATE BALANCE
Taking a loan to invest is a tricky business. Theoretically, profiting is achievable as long as the investment returns outperform the loan interest. As always, thorough research is crucial, considering the volatility of markets and potential losses. Consult a licensed financial advisor to navigate investment loans cautiously.
KEY FACTORS FOR INVESTMENT LOANS
- Assess your creditworthiness, reflecting your personal and business credit scores, as well as your debt-to-income ratio.
- Compare interest rates and terms, taking into account the loan repayment schedule and any early repayment penalties.
- Evaluate the investment potential, including the likelihood of generating high returns and your risk tolerance.
- Choose the investment type wisely, considering its nature, specific requirements, and relevant financing options.
- Explore alternatives to personal loans for investments, as they may offer more flexibility or lower risk.
- Gather required documents, such as financial statements and business plans, to present your qualifications for loan eligibility.
While debt can be a double-edged sword, careful planning, research, and consultation with professionals can help make informed decisions about leveraging loans for investment purposes.
- Given my financial situation and the potential benefits, I might consider revisiting the idea of taking a loan with a lower interest rate than the insurance policy's returns, as a strategic approach to investing, if managed responsibly.
- Delving deeper into the nature of debt, I can now appreciate that not all debt is detrimental; in fact, debt used for essential needs, business ventures, or income-generating investments can fall under the category of 'healthy debt' – as long as the debt servicing ratio stays below 35%.
