Is it Wise To Borrow Money To Invest?

Many personal finance experts answer this question based on the math. They figure if we borrow from one party to invest the money and make a profit, that makes sense. After all, you’ll beat the interest rate you’re borrowing at, right? In theory this is a wise move. But is it the best? Let’s explore this question in greater detail and look at the pros and cons.

The Faith Perspective

The Bible has many things to say about debt. As Christians, shouldn’t we consider what the scripture says? Read this powerful verse:

“Let no debt remain outstanding, except the continuing debt to love one another, for whoever loves others has fulfilled the law.” -Romans 13:8 NIV

It’s clear that God doesn’t want us to be in financial debt, and surely wants us to avoid new debt. Instead, the Lord calls us to love one another – this should be our only continuing debt. One might question why the Bible teaches against the use of debt.

Debt: Pros vs. Cons

We talked about how some financial counselors recommend going into debt in order to invest at a better rate. While this looks like an attractive benefit, consider these cons:

  • Debt incurs more risk. The longer you hold onto your debt – the longer you owe someone something – the more power they have over your life and the greater the chance you won’t be able to pay it back. This is a major risk. Think about all the homes that have been foreclosed on in the past few years. Nobody saw it coming before it was too late. Never forget that debt always incurs more risk.
  • Debt incurs higher costs. When you take out a loan, you’re going to pay interest. Sometimes this interest becomes so great, it makes your bills unaffordable. Who wants to spend money to spend money?
  • Your investment might not outpace your loan. Companies fail, stocks crash, and you might end up with a huge problem on your hands. If your return on investment falls below your loan’s interest rate, you’re in trouble. It is my conviction that the person who invests should already be completely out of debt and have a large fully-funded emergency fund.

Sure, some people have had success borrowing money to turn around and invest. But ask yourself, do you think this is the norm? Is this really the best strategy out there?

The Tortoise Approach

We all know the story about the tortoise and the hare. The hare runs fast, jetting past his friend the tortoise with amazing speed. He wants to outpace the tortoise and teach him a lesson or two. But soon, the hare gets tired, complacent, and decides to munch on a nice juicy carrot.

Meanwhile, the tortoise sticks with his philosophy – slow and consistency wins the race. Sure enough, much to the hare’s surprise, the tortoise inches ahead to proclaim victory.

This is much how investing is: slow and steady wins the race. Don’t try tricks and gimmicks to beat your fellow man. Just do what he’s not doing: be consistent. If you’re in debt, blast through it. If you need an emergency fund, get it started! Soon, you’ll have the financial foundation you need to soundly invest your money.

Your Thoughts?

I’d love to hear some feedback on this question. Do you think it is a smart move to borrow to invest? Maybe you have a different perspective than the one I offer. What’s your opinion? I used to argue that borrowing to invest could be smart in some circumstances, but now I believe that is not the case. Write us a quick note in the comments section. We’re waiting to hear from you!

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  1. Caroline

    Personal experience tells me its a bad idea. I would rather save money to invest than to borrow money to invest.

    I borrowed money and invested and lost all. So I was left in a worst situation than where I started.

    My advice. Don’t do it. Save money to invest. If you can save, then wait until you are able to do it.

  2. Sandy @ yesiamcheap

    I don’t like it, but I understand it…somewhat. I see people on that borrow to reinvest all the time. What happens if someone defaults or if your investment sours? Then you don’t just lose your investment, but now you owe the money plus interest based on where you borrowed it from.

  3. Paolo

    As is often the case, it depends. First off, do you have the emotional temperament to be comfortable with taking on the added risk that comes with borrowing to invest. If you already lose sleep when your investments are under performing, then borrowing is not for you. Second, do not get in over your head, in other words borrow more than you can afford to in the first place. Consider your cash flow and the liquidity of your assets against what you are looking to borrow. Third, always have your exit and sell strategy planned out in advance. Lastly, understand what you are investing in, quality is always important. … As an investment specialist, I only offer this strategy (aka: leveraging) to seasoned, experienced and sophisticated investors. Also, always in consideration of their tax situation. Disclosure: I do make leveraged investments.

  4. Terry

    Very good article. Lack of patience gets us in trouble most of the time. Sometimes we question God, you have done so believe it or not. Job 38 speaks about questiong God. So when we begin to question Him we get impatient and make mistakes that will cost us. I say take the slow road, trust God and your gains will be larger.

  5. Paolo

    In following this discussion to date, it seems that I am of the minority opinion. Being somewhat of a contrarian, I am not uncomfortable by this. Instead, I will address the issue with some detail.

    As I previously commented, borrowing to invest is not for everyone. Anyone contemplating to do so must not only have a high emotional/psychological tolerance for risk taking, but also the ability to financially do so. Lacking this, especially the financial side of it, is what will take this strategy from the investor side to the purely speculative (gambling, as some have described it) side of the ledger. Furthermore, given that you are employing someone else’s capital, one could argue that it is even a moral obligation to exercise some prudence in using borrowed funds. Though, some of the obligation, if not the responsibility does (should?) fall on the lender, who has decided to let someone else use their funds in exchange for a predetermined (safe) return.

    This in mind, borrowing to invest should be no more gambling than choosing to invest one’s own funds. If it is not, then it is most likely because proper due diligence was not done and/or there is a lack of diversification of risk within the portfolio of investments.

    Assuming that diligence has been done, investment opportunities identified, suitability of the investments determined, based on both the investor’s needs, objectives and risk tolerance, as well as, how they fit into an existing or proposed portfolio of investments, then all that remains is the question, why do it.

    Here are a few reasons why a person might consider to borrow for investing:
    –As an alternative to a purchase payment plan. Here the targeted principal objective is borrowed and invested upfront. The funds that would be used for the purchase plan are redirected to pay down the loan. Attractive, when borrowing rates are low and long-term potential returns are greater than current lending rates. Even more attractive when part or all of the loan interest can be expensed or offset by a tax break of some sorts.
    –Used as a tool to help smooth out variable revenue or cash flows.
    –To unlock some of the capital appreciation or equity of a holding. This could be an alternative to selling the holding and triggering taxable capital gains or when it would be impractical to selling the holding, for example, one’s home.

    I recognized that the last reason, given the on going economic situation and past financial crisis is most likely drawing red flags with many. Nevertheless, we should make a distinction between borrowing to invest versus borrowing to consume. For example, if the borrowing is used to add to an existing portfolio to help it increase its income distributions and related cash flow, this may be very sensible. Such a tactic could allow someone stay in their home during their retirement years. When they are ready to sell, the debt if not yet paid off at that time, will be paid off with the proceeds of the sale of the home.

    Borrowing to invest is not for everyone or for every situation. Because it adds to the risk, it is important to make sure that there is some obvious benefit to do so, such as an arbitrage or cyclical opportunity. Furthermore, try to borrow in conjunction with the ability to use tax breaks or the expensing of interest charges to keep cost and risk down. Also, if you are already heavily indebted, you most likely should not be adding to the your debts. Lastly, always have and exit strategy in hand, in the event that something does not go as planned or that the investment does preform as expected. If one keeps these things in mind, borrowing to invest is not much riskier than buying a home with a mortgage after making a good down payment.

  6. Mid-life professional wife

    Thanks for this insightful discussion. I and my spouse came to this article seeking some insight into the pros and cons and faith principles after being presented with a borrow-to-invest strategy from my investment manager.

    In an earlier phase of life we followed the tortoise strategy to the T, avoiding debts or paying them down fast, and saving up diligently, and living within our means. We did spend a lot of our early savings in late 20’s on my advanced education, but that turned out to be a wise investment itself, so now one of us can be a homemaker and support the other rather than having to both work and do housework and live a more hectic, difficult life.

    Now I think we’re in a situation like Paolo describes, with no other debts except a home with a low mortgage and high market value, a good amount of savings built up, good cash flow, and maxed out on other ways of investing.

    Borrowing a reasonable amount does not seem as risky or unwise given my current overall portfolio and the tax benefits of doing so, and the limited time I as sole wage earner have left to slowly build up more savings before retirement, God willing. It seems like an opportunity that might make sense at this phase of life and in my country’s relatively ok economic situation (in Canada). I might have a good window of opportunity to potentially support my husband and I more financially, and if it fails we will still be ok. The invested $ itself won’t go into high risk areas.

    I am prayerfully seeking guidance while doing more discussion and research with my spouse. We’ll only do it if our borrowing interest rate is good enough, and we’ll have to think about how much principal we can afford in our monthly budget, leaving lots of wiggle room for unforeseen expenses. Thank you for your thoughts, John and Paolo.