Is It Good to Borrow for Investment?

By Dave Nyam •  Updated: 09/20/24 •  5 min read

Borrowing cash to invest is a good, attractive option in SA. This is because one is presented with an opportunity to increase wealth by investing capital availed through debt. On the downside, this approach involves a hefty dose of leveraging and, thus, attendant risks and complications. While it might amplify gains, it also amplifies losses. Thus, it’s pivotal to understand how this works and the associated risks and disadvantages before making any decisions.

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Is Borrowing for Investment a Perfect Idea?

In summary, borrowing to invest can be equally good just as it’s risky, depending on an individual’s financial situation and risk tolerance. In South Africa, leveraging can work in your favor if the returns from your investment are more than the cost of borrowing, such as the loan’s interest. However, it starts giving problems where the investment fails to turn up as expected, thus compelling you to repay the debt.

Can You Take Out a Personal Loan to Invest?

The answer is ‘yes,’ but this usually carries plenty of risks. These advances are widely available in South Africa from banks, credit providers, and fintech companies. You may use those overdrafts to invest in various assets, ranging from equities to property, or even to initiate a business. However, their interest percentage is often higher than other borrowing forms, such as home loans or margin credits.

How Does Borrowing to Invest Work?

Borrowing to invest could be referred to as leveraging, where one incurs debt to receive returns on investment of money borrowed. This is a widespread strategy in South Africa for stock market investments, property investments, businesses, and even sometimes ordinary people. In general, the process goes this way:

What Are the Cons of Borrowing for Investment?

While there is the potential to increase gains, even for many people, the drawbacks/risks associated often outweigh the benefits. Some of the major disadvantages include:

Are There Any Risks to Borrowing Money?

Of course, there are. The SA market has considerable risks associated with borrowing cash for investment, which every capitalist should carefully consider. A few of the significant risks associated with this type of strategy in the South African context include the following:

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