Borrowing to invest

Most people consider it to be an advantage to be without debt. This is a very sensible and conservative policy to have, but there are a lot of evidences these days proving that people are more willing to borrow and get into debt that ever before. Over the years, debt levels continue to grow over the years. Why is this happening?

If you don’t have an idea why people keep on borrowing money, you probably haven’t heard about gearing. Gearing in finance is also known as borrowing to invest. It includes any type of borrowing to invest, whether it is cash loans for purchasing shares, or a large loan for an investment property or a new business.

While gearing is often considered to be highly risky, there is good debt as well as bad debt and the association of high risk with gearing only applies if the borrower has failed to plan for their gearing.

Businesses and individuals at some point borrow money to make a purchase or to invest. When investing, borrowing allows us to almost instantaneously access more funds so that we can reap larger returns on our investments. If we got more funds, we can take advantage of the opportunities as we grow and diversify our investment.

Apart from being able to grow your investment or capital, borrowing to invest is also tax effective. The interest payments on the loan are normally tax deductible only to the extent that the loan amount is used to purchase the shares. In these circumstances generally, borrowing to invest may give you some tax advantages.

Borrowing to invest

However, borrowing to invest also comes along with risks. The more you borrow, the greater the risk becomes as you have the repay the money you borrowed regardless the performance of your investment.

To learn more about the pros and cons, as well as other important information about gearing or borrowing to invest, check out this post: https://www.moneysmart.gov.au/investing/borrowing-to-invest