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.

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