Great deal on a loan?
One of the benefits of attending the Air Force Academy is that I can get a $35,000 loan from the government at a very low rate of interest (less than 1.5%) at the end of my junior year. At that time I will be 21 years old.
Should I take the loan and invest it aggressively? The interest rate is lower than the historic rate of inflation, so the odds are good that I will make money on the deal.
However, I am leery of investing borrowed money. There is no obligation to take the loan.
Is the opportunity to profit worth the risk?
Please explain what you would do, and why.
Well mathematically it makes a lot of sense, but first of all you need to figure out what you'd want to invest the money in.
Originally Posted by TheLaughingCow
Obviously you need to make sure your rate of return on the investment is higher than the 1.5% you're paying... and I'm sure you knew that.
That is very low. I would try to invest in a very diversified, safe portfolio. The market is doing ok so even investing in a index is ok I would say.
How far away in time is Junior year? In other words when do you need to pay it back?
If possible I would try to borrow 5K to start with and then if it goes well try borrowing more, why not.
But do make sure you know what you want to invest in before doing anything, which means figuring out a target rate of return on your money and an acceptable level of risk you want to take.
In general this sounds like a bad idea to me. While I can understand the logic behind it, you're drastically increasing the amount of risk that you are exposing yourself to with a strategy like this. Investing $20,000 that you have is much different than investing $20,000 that you borrowed. Unless you are confident on a high rate of return over an extended period you are asking for trouble here. Keep in mind also that you need to make payments on this loan over its life so you are also increasing your expenses in the hope of making money on a non-guaranteed investment. Right now, a retarded monkey could blindly invest in the stock market and do better than 1.5% but I don't feel like this will continue much longer. Even if you return 10% on this money, your upside profit is only $2,000 minus the interest and your liability is the full $20,000. That doesn't sound like a good deal to me personally. It really boils down to how confident you are that you can significantly outperform the loan rate and how much risk you are willing to accept.
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