A:

The only time it makes sense to invest a loan is when the return on investment of the loan is high and the risk level of the investment is low. It is inadvisable for an investor to invest in a loan through a risky investment avenue, like the stock or derivatives market. Also, if an investor takes out a loan, it does not make sense to place the money in an investment that will mature after the loan is due. It is also important that the investor makes sure that the return on investment is greater than the cost of the loan.



Certificates of deposit (CD) and bonds fit into this category, as do investments that will mature in 90 months or less and yield greater than 10% (the cost of the loan).



Read the answer to our frequently asked question What is the difference between leverage and margin? to learn more about this concept.



RELATED FAQS

  1. When capitalizing interest, will interest accrue while you are in a deferment?

    Learn what capitalized interest is. Understand why interest accrues while a person is in a deferment, based on capitalized ...
  2. Why is more interest paid over the life of a loan when it is capitalized?

    Learn what it means to capitalize interest on a loan. Understand why more interest is paid over the life of a loan when it ...
  3. What are some examples of simple interest loans?

    Learn about two common examples of simple interest loans. Understand what simple interest is and learn why it's important ...
  4. How can I use the correlation coefficient to predict returns in the stock market?

    Read about simple interest loans, how they function, and some of the loan products or contracts that are most likely to carry ...
RELATED TERMS
  1. Personal Property Securities Register (PPSR)

    A written, public, online record of legal claims to personal ...
  2. Purchase Money Security Interest (PMSI)

    A security interest or claim on property that enables a lender ...
  3. Deficiency Balance

    The amount owed to a creditor if the sale proceeds from the collateral ...
  4. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...
  5. Debt Consolidation

    The act of combining several loans or liabilities into one loan. ...
  6. 28/36 Rule

    A rule-of-thumb for calculating the amount of debt that can be ...

You May Also Like

Related Articles
  1. Trading Strategies

    Eyeing a Loan? Consider Skipping the ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!