Archive for September 28, 2016

Borrowing to Invest

At some stage, most businesses and many individuals borrow to make a purchase or to invest. Whether it is cash loans for purchasing shares, or a large loan for an investment property or a new business, borrowing to invest can be beneficial. This process is also known as gearing and it includes any type of borrowing to invest.

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While gearing is often considered to be highly risky, there is good debt as well as bad debt and the association of high risk with gearing only applies if the borrower has failed to plan for their gearing.

The most obvious advantage of gearing is that it allows you to access more funds, allowing them to reap larger returns on investments. Having more funds available allows you to take advantage of opportunities as they arise and diversify their investment portfolio. When a good speculative or share opportunity arises, you can have quick access to funds and will benefit from taking out a quick cash loan.

However, borrowing to invest can also become a disadvantage. That happens when the interest and costs associated with the investment are more than the income you receive from the shares, property, or any other kind of investment.

For more on borrowing to invest, read this article from Australian Securities Commission: https://www.moneysmart.gov.au/investing/borrowing-to-invest