Certainly, many have heard about the legend of an economist who, according to a public-spoken story, made money for himself to pick up student loans during his university years and invested in higher returns than he had to pay back. Well, we did not meet the economist in question (as is probably not the case), but we try to clarify a few things about whether to borrow for investment.
The story mentioned as introduction was widely available in the years when student loans were introduced, because the interest rate of student loans as state-supported loans was very favorable, well below the market interest rate then. So, at first glance, it might have seemed incredibly easy to get rich with this clever and lively idea, which was quite contrary to the purpose of the student loan. At the same time, if we think about the amount that could be taken as student loans at the time (up to 500 thousand HUF per year), and what profit could be obtained from the interest rate difference, we will doubt more about the possibility of quick enrichment.
If someone invests in a loan, the profit will only be the difference between the net return on the investment and the interest and other fees on the loan. It doesn’t sound so good yet, despite the fact that credit development and investment are very common in the economy – it is much more in the corporate market than in the retail market. This is because corporate customers can access credit on more favorable terms, take out a loan for other types of investment than the population, and the risk is different (someone is not responsible for the loan with their personal assets).
There is also a construction that can work in the area of retail lending
For example, if someone buys an apartment with a view to issuing and covering repayment from the rent, it may in principle be a good investment in today’s low home loan rates and high rents, especially if the investor is confident that the property price will rise . But there is also a lot of risk here: if interest rates rise, rental rates start to fall or if the property price falls, it is not worth the investment so much as it will be inferior to other investments. In addition, you need to have a self-contribution, you have to include it in your own savings, as well as an appropriate level of income, as the bank cannot take into account the future rent when applying for a loan. And this was an example of perhaps the most favorable and least risky construction.
In the current market environment, interest rates are extremely low, but interest rates on personal payday loans are still around 10-20%. Hence, a higher net return should be achieved with the investment. It is hardly possible to find an investment opportunity that has similar figures in the short term. In fact, even with the 10% yield, you can only find yourself among the most risky assets, where not only the lower yield level, but even the loss is likely to occur. The loan has to be repaid from the first month, when it is hardly possible to realize any yield at all, so you have to save on the repayment.
But even if we find the best investment opportunity with huge luck, the net return of which we say is 1 percentage point higher than the personal payday loan THM, then we can achieve a profit of only HUF 10,000 per year by HUF 1 million. Not only is this a small amount, but even the rate of inflation is below the yield, and virtually any low-risk investment can yield higher returns. Of course, even a world-renowned bitcoin-like success story can be grasped, which disproves the calculation, but it would simply be an irrational behavior to take such a high risk for an uncertain, dubious output.
Therefore, we do not recommend anyone to take out a personal payday loan for investment purposes. In principle, it is not excluded that a higher yield can be realized than a loan interest, but with a huge risk and very good luck, only a very small amount could be obtained by such speculation. It is much more like a gambling terrain than a rational investor behavior, and it really is no different than buying a lottery ticket from a loan because it trusts that it will be five-point. Thinking about the future, it is worth saving as much as possible and investing as much as possible, but do it all from your income and not from your credit!