Investing money is part of the American dream. Done right and with a little luck, you can grow small amounts into a fortune. The dark side, however, is that you can lose money (which I have done) and you must be willing to accept a little risk. I’m asking myself the question, “Should I Get a Loan to Invest More Money?” It’s a risky question, especially to ask the wife at night before bed. I’m not seriously considering it, but I want to at least explore the possibility.
How Much Can I Get a Loan For?
Right now, I could get a 30 year mortgage for $150,000 to $200,000 on another house at about 3.75%. As a loan, that would equal about $700 – $1,000 dollars a month. This makes me ask the question of how much could I get a loan for so I could get immediate cash and then take that cash and see if I can generate a return higher than the cash value. My goal is going to be getting a loan – either a home equity line of credit, or some kind of other loan for $50,000 to $100,000 dollars. Because my credit is excellent, I think this is a legitimate possibility.
So l’m going to run through two scenarios. Investing $50,000 in peer to peer lending right now and what that will turn into over time -vs- what I am doing now and investing $100,000 in peer to peer lending right now and what will that turn into over time. Currently, I am investing with Prosper.com and earning a healthy 12.8%. I’m 6 months in and have had no defaults yet, however, I’m not naive and know those will likely occur in the future, pushing my rate of return lower. Still, I expect to earn at least 7%, which would be more than paying back 3.75%.
In addition to this, I am very interested in being financially secure by 50 years old. That’s about 15 years from now for me. So my goal will be to get as close as I can by that time. Currently, I invest $510 of my paycheck each month in peer to peer lending. With what I have invested now, at age 50, I will have the following:
Current path of peer to peer lending at age 50 (and age 65):
Age 50 (7% yearly return):
Account Balance: $178,000
Monthly Interest: ~ $1,050
Age 65 (7% yearly return):
Account Balance: $600,000
Monthly Interest: ~ $3,700
It certainly appears that by age 65 I will be well on my way. But I really want to shoot for age 50 because in 15 years, am I really going to want to keep getting up to go to work each and every day? Let’s see what the numbers look like if I infuse $50,000 and $100,000 right now and keep my current monthly contribution of $510 at 7%. I’d have to be disciplined to use my work paycheck to pay off the loan in short order each month.
Age 50 (7% yearly return, with $50,000 infused right now):
Account Balance: $290,000
Monthly Interest: ~ $1,700
Age 65 (7% yearly return, with $50,000 infused right now):
Account Balance: $950,000
Monthly Interest: ~ $5,550
Things look very nicely at age 65 with that extra $50,000… But age 50 still looks too low. I want about $5,000 at age 50. With an extra $100,000 it certainly seems more plausible to get a decent monthly income from peer to peer lending, but let’s run the numbers just to be sure.
Age 50 (7% yearly return, with $100,000 infused right now):
Account Balance: $420,000
Monthly Interest: ~ $2,500
Age 65 (7% yearly return, with $100,000 infused right now):
Account Balance: $1,300,000
Monthly Interest: ~ $7,600
Even with an extra $100,000 right now, at age 50, I’m only going to be getting $2,500 in monthly income at 7%. But at age 65, this income stream is well on its way to being a good provider. So how do I get $5,000 at age 50? Let’s try a 10% return, which is aggressive, but let’s see what happens if I achieve that yearly.
Age 50 (10% yearly return, with $100,000 infused right now):
Account Balance: $585,000
Monthly Interest: ~ $5,000
Age 65 (10% yearly return, with $100,000 infused right now):
Account Balance: $2,630,000
Monthly Interest: ~ $22,000
Age 50 works out in this case with just a 3% greater return and at age 65, holy !@#, I’ve got a $22,000 a month passive income stream. And at age 75, just for kicks, I’ve got a $58,000 A MONTH income stream. Time and consistency yield massive results…
Should I Get That Loan to Invest Then?
If there’s one thing I’ve learned from investing, particularly in stocks, is that you can lose money. I’ve lost thousands in the stock market and don’t doubt that I will make trades in the future where I will curse myself for having done so. I’m eyeing AGNC for instance and could get lucky buying at a low point right now. Or it could be a falling knife and I could lose a thousand just as easily as make it. There’s no guarantee Prosper lending will yield at least 7% return each year, even when I am earning 12.8% with it right now. But perhaps with some luck I could make it work.
I’m leaning more toward not taking out a loan to invest right now, and just working my tail off to earn a higher return and earn more money from stocks, real estate, my own business, and my day job. I feel the combination of all of that working out well will give me a good chance to retire at 50 (wish it was 40, but I only really starting investing this year).
Have you ever taken out a loan to invest, or known someone who did so? How did it work out?
- What Being Rich Might Look Like
- Investing Article on Financial Samurai
- 42 Cents Closer to Financial Freedom
- Passive Income for a Noobie
- Q1 2013 Money Report: Stocks, Lending, Bit Coins, and Personal Business