Have you ever heard of the phrase, “it takes money to make money”? To a large extent, this is true as you reap higher returns from larger investments. And so, given that many of us lack the capital to enter into larger investments, we may be tempted to borrow money to make up the shortfall.
Gearing, or more simply stated as borrowing to invest is one viable option when attempting to make larger investments. However, it does not come free of risks, in fact it can be taught of a leveraging multiplier tool where both the risk and potential returns are exponentially increased. Additionally, there are other benefits and less obvious risks that gearing poses. In this article, we aim to give a brief overview of the factors that you should carefully weigh before you decide to get a personal loan in Singapore.
The pros of gearing
Intuitively, gearing is able to give you a higher amount of cash on hand, thus allowing you to start investing in more costly financial instruments that you would otherwise not have been able to afford. Additionally, depending on current governing policies, you may be granted tax deductions for interest payments made on the loan.
The cons of gearing
Four types of common risks exist when you borrow to invest.
Given these risks, should I borrow to invest?
Where you foresee relatively high and stable future returns on an investment, gearing can be a powerful tool to help get you into the game. Ideally, you will achieve positive gearing, where the returns on the investment rolling in will be sufficient to cover your monthly repayment loans in Singapore. Conversely, you will hope to avoid negative gearing were returns are less than payment owed.
Additionally, gearing is typically a medium to long term strategy, with returns arriving later in the timeline, thus requiring you to have plans for affording the loan in time. During which, sufficient financial flexibility should be maintain for contingencies. To help reduce risk, you should consider diversifying by spreading your investments. This safeguards you from a single negative economic event which might wipe out your geared investment.
Without a thorough understanding and accurate forecasting of both the returns and risks, you may find yourself deep in debt. As such, gearing is typically only used for experienced investors with sufficient appetite for risks.