# Using Loan to Invest - Paying Monthly Installments by Selling Originally Bought Shares

I'm trying to determine how much profit or rate of return is required from a financial instrument, say stocks, to break even with a loan taken out for this. I'll use specific numbers to simplify.

Suppose a bank gives:

• Loan = 10,000 USD,
• Months = 24,
• Monthly interest rate = 0.30%
• The loan must be paid back in monthly installments, so monthly interest + monthly amortization = 10000(0.0030) + 10000/24 = 30 + 416.67 = 446.67.

I intend to pay off the monthly installments only with gains from stocks. So I'd sell some stocks every month or two months to cover the monthly payments.

I'm guessing the necessary profit is just the total interest on this loan = 0.30%(\$10000)(24) = \$720 USD ? So I'll break even on this loan - if and only if - I make \$720 from stocks over 24 months (so the rate of return is 720/(10000 + 720) = 6.716%).

Anything wrong here? This feels too simple? Are there better ways to think about all this? Also, how often should I the sell stocks to cover the monthly payments?

• What country are you in? How your gains are taxed (as income, or capital gains) and at what rate depends on where you live. Since you are borrowing USD, does that mean you are in the U.S.? – Chris W. Rea Nov 4 '13 at 15:07

In addition to the answer from CQM, let me answer your 'am I missing anything?' question. Then I'll talk about how your approach of simplifying this is making it both harder and easier for you. Last I'll show what my model for this would look like, but if you aren't capable of stacking this up yourself, then you REALLY shouldn't be borrowing 10,000 to try to make money on the margin.

Am I missing anything? YES. You're forgetting (1) taxes, specifically income tax, and (2) sales commissions//transaction fees.

On the first: You have not considered anything in your financial model for taxes. You should include at least 25% of your expected returns going to taxes, because anything that you buy... and then sell within 12 months... is taxed as income. Not capital gains.

On the second: you will incur sales commissions and/or transaction fees depending on the brokerage you are using for your plan. These tend to vary widely, but I would expect to spend at least \$25 per sale.

So if I were building out this model I would think that your break-even would have to at least cover:

• monthly interest + monthly principal payment

• income tax when sold

• commissions and broker's fees every time you sell holdings

On over-simplifying: You have the right idea with thinking about both interest and principal in trying to sketch this out. But as I mentioned above, you're making this both harder and easier for yourself.

You are making it harder because you are doing the math wrong. The actual payment for this loan (assuming it is a normal loan) can be found most easily with the PMT function in Excel: =PMT(rate,NPER,PV,FV)... =PMT(.003, 24, -10000, 0). That returns a monthly payment (of principal + interest) of 432.47.

So you actually are over-calculating the payment by \$14/month with your ballpark approach. However, you didn't actually have all the factors in the model to begin with, so that doesn't matter much.

You are making it artificially easier because you have not thought about the impact of repaying principal. What I mean is this--in your question you indicate:

I'm guessing the necessary profit is just the total interest on this loan = 0.30%(\$10000)(24) = \$720 USD ? So I'll break even on this loan - if and only if - I make \$720 from stocks over 24 months (so the rate of return is 720/(10000 + 720) = 6.716%).

This sounds great-- all you need is a 6.716% total return across two years. But, assuming this is a normal loan and not an 'interest-only' loan, you have to get rid of your capital a little bit at a time to pay back the loan. In essence, you will pay back 1/3 of your principal the first year... and then you have to keep making the same Fixed interest + principal payments out of a smaller base of capital.

So for the first few months you can cover the interest easily, but by the end you have to be making phenomenal returns to cover it.

Here is how I would build a model for it (I actually did... and your breakeven is about 1.019% per month. At that outstanding 12.228% annual return you would be earning a whopping \$4.)

At least as far as the variables are concerned, you need to be considering:

• Your current capital balance (because month 1 you may have \$10,000 but month 2 you have just 9,619 after paying back some principal).

• Your rate of return (if you do this in Excel you can play with it some, but you should save the time and just invest somewhere else.)

• Your actual return that month (rate of return * existing capital balance).

• Loan payment = 432 for the parameters you gave earlier.

• Income tax = (Actual Return) * (.25). With this kind of loan, you're not actually making enough to preserve the 10,000 capital and you're selling everything you've gained each month.

• Commission = (\$25 per month) ... assuming that covers your trade fees and broker commissions. I guarantee you that this is not the deal breaker in the model, so don't get excited if you think I'm over-estimating this and you realize that Scottrade or somewhere will let you have trades at \$7.95 each.

• Monthly ending balance == next month's starting capital balance.

Stack it all up in Excel for 24 months and see for yourself if you like. The key thing you left out is that you're repaying each month out of capital that you'd like to use to invest with. This makes you need much higher returns.

Even if your initial description wasn't clear and this is an interest-only loan, you're still looking at a rate of about 7.6% annually that you need to hit in order to just break even on the costs of holding the loan and transferring your gains into cash.

"The market can stay irrational longer than you can remain solvent" -John Maynard Keynes

The stocks could stagnate and trade in a thin range, or decline in value. You assume that your stocks will offer you ANY positive return for every month over 24 months. Just one month of negative returns puts you underwater. Thats whats wrong with it.

Even if you identified any stock that has been up every month for a consecutive 24 months in the past, there is nothing that says it will be so in the future, and a broad market selloff will effect both indexes as well as individual stocks.

Literally any adverse macroeconomic event in the next two years will put you underwater on your loan, no matter how much research you do on individual stocks.

• Isn't this an appeal to exaggerated danger? You're basically saying that it's too risky to put money into stocks so therefore you shouldn't invest into stocks. – Narcotixs Oct 29 '18 at 16:22
• No @narcotixs it isnt saying that, but on the topic of using a loan to invest in stocks it is showing the folly of attempting it. That it very distinct from investing at all, so I think that undermines your premature philosophical conclusion. – CQM Oct 30 '18 at 7:38

I will add one point missing from the answers by CQM and THEAO.

When you take a loan and invest the proceeds, the interest that you pay on the loan is deductible on Schedule A, Line 14 of your Federal income tax return under the category of Investment Interest Expense. If the interest expense is larger than all your investment earnings (not just those from the loan proceeds), then you can deduct at most the amount of the earnings, and carry over the excess investment interest paid this year for deduction against investment earnings in future years. Also, if some of the earnings are long-term capital gains and you choose to deduct the corresponding investment interest expense, then those capital gains are taxed as ordinary income instead of at the favored LTCG rate. You also have the option of choosing to deduct only that amount of interest that offsets dividend (and short-term capital gain) income that is taxed at ordinary rates, pay tax at the LTCG rate on the capital gains, and carry over rest of the interest for deduction in future years. In previous years when the tax laws called for reduction in the Schedule A deductions for high-income earners, this investment interest expense was exempt from the reduction. Whether future tax laws will allow this exemption depends on Congress.

So, this should be taken into account when dealing with the taxes issue in deciding whether to take a loan to invest in the stock market.