Most people take out a personal loan to buy a new car, go on holiday, undertake home improvements or consolidate debts. A personal investment loan is a whole other ball game. Sure, there are similarities, but where a personal loan tends to be for a smaller amount and used to purchase consumer items or manage consumer debt, an investment loan can assist people to hold assets they would not otherwise be able to access in the short term. An example might be blue-chip shares.
Interest rates
When you take on debt to acquire an asset however – just as when you borrow money to buy a house – it’s important to get the balance right. You don’t want to lose money when you buy property and you also don’t want to pay interest on a personal investment loan to hold dud shares or other asset that suddenly devalues. Interest rates can vary from around seven percent up to a comparison rate of 20 percent per annum depending on the type of loan and provider. For 100 percent capital guaranteed investments you can expect to pay around nine percent interest.
100% Capital Guaranteed
Providers of 100% capital guaranteed loans include ING, Macquarie Bank, ABNAMRO, Fundbroker.com.au, HSBC, Lloyds and Nordea, to name just a few. They will often only lend against their own investment products so you will also want to research their equity fund opportunities.
And of course, taking out a loan to invest may seem counter intuitive: isn’t the point of investing to make money? If you’re paying off a loan and paying fees and charges will you really be better off?
Investment portfolio fees and charges
If you are taking out a loan for investment purposes then finding the right balance between fees, interest repayments, tax credits and growth is the key. With thorough research and good advice it may be possible to find a mix of investments that will deliver a positive return.
The first priority for leveraged investors is to choose a stable investment portfolio. Investments that promise a high return can also be high risk and the impact could be severe if you invest in shares and must respond to a margin call.
Diversified investments
The Australian Securities and Investment Commission have estimated that in the past six years, Australian investors have lost more $500 million in failed investments, either due to investing in risky schemes or because they didn’t diversify their investments, instead “placing all their eggs in one basket”.
That said, many people also made a lot of money through investing over the same timeframe. Good advice and thorough research is essential to sound investing. You can get good returns when you work with reputable companies and diversifying your portfolio also helps minimise risk. If funds for the investment are borrowed, then calculating repayments and measuring them against any possible returns is essential to working out the sizes of your gains.
Also note that if investments grow fast early on in the investment term the loan can also be finalised in a shorter time, although a discharge processing fee or break charge will often be applied. Becoming familiar with the lender’s charter of fees and charges is essential when deciding upon an investment strategy and choosing an investment loan product.
Reducing interest, raising income
When taking out a loan for investment reasons, it’s vital to widen the gap between income earned and interest paid. The best way to do this is by making the repayments as large as possible over the shortest possible timeframe. Keep it realistic though so your repayments are a manageable size and to avoid missing any repayments. (Missing repayments could negatively affect your credit rating and reduce the value of your returns).
There is a huge variance these days on loan interest rates. Deciding on a fixed or variable interest rate could reduce interest, and some variable rate loans also allow a re-drawing option as well. Having a good credit rating will increase your chances of securing a competitive loan with a low interest rate.
If you are investing in a capital-protected fund often the fund will lend you 100 percent of the amount given certain conditions. Check with your financial planner before making any major investment.
