Using Loan to Invest - Paying Monthly Installments with Monthly Income
The best strategy? Skip the loan. Find a way to invest for a low starting amount via a retirement account (such as a 401K or IRA in the United States) or non-retirement account. Use this money to buy individual stocks or funds. Every month put money from your regular income into this investment account. Then buy more stocks or sell if the conditions change based on what the market is doing, not to meet a loan payment. This helps you because if the price fluctuates you will buy more shares if the price is down; and you will buy fewer shares when the price is up. It also allows you to skip worrying about how to repay the loan. It also means that you not have to pull more money out of savings to make the final loan payments if it doesn't make as much money as you plan. Regarding your math. This is a better understanding of the money flow than the earlier question. "I hope I'm misunderstanding your plan... you want to invest in a way that will make SO MUCH that you pay back all of the loan payments with investment gains? Like the answer I gave on the preceding question, and like @littleadv's comment/mhoran's answers... don't do this. No good will come of it.  This strategy requires higher returns, but does not necessarily give you a better return.   But because you asked the question again, let me specify what you're missing... I do think that learning is a good thing. It boils down to two very significant problems that you haven't addressed:  (1) Where are you getting your monthly ""income"" from?  (2) Realistic vs. Daydreaming--How big do any gains have to be and does that exist in the real world in a way that you can capture?  In a nutshell, if my answer to the last question showed that it's crazy to invest and pay back out of your capital and income... since you're trying to keep your capital and only pay back with monthly gains, this one will require even higher and thus more unrealistic gains.  The model you're implying:  If that's what you mean with this model, (which I think you do), then here are my two very key questions again: How are you getting your monthly income? Financial investments (i.e. stocks or bonds) will have two components of value. One component of value is the stream of payments, such as a monthly dividend from stocks that pay those, or the interest payment from a bond. The other is the ability to resell a security to another investor, receiving back your capital.  So... you either have to find Bonds//Dividend stocks that pay >52% returns tax-free each year, and pay this loan off with the payments. (Or higher returns to cover taxes, but these kinds of investments do not exist for you.)  OR you can try to invest in something, pray that it goes up ≥4.323% per month and so that you can sell it, pay back your loan payment with the proceeds, and use the capital to buy your next investment... that will go up 4.323% per month, to turn and sell it again.  The pros that do model this type of speculation go into much more depth than you are capable of. They build models that incorporate probabilities for rates of return based on historical data. They have better information, and have specialized in calculating this all out. They even have access to better investment opportunities (like pre-IPO Twitter or private notes). You just won't find the opportunities to make this happen, each month, for 24 months. (Again, you won't find them. They do not exist for you in as an investor in securities) Realistic vs. Daydreaming So... clearly I hope that by now I have convinced you that these would be the required returns. They simply aren't available to you. If they were, you would still run into obstacles with converting 'book' returns into physical money that you could repay the loans with, and then continuing that growth.  And while I appreciate the notion that 'if I could just make the payments each month, I'd have $10,000 after 24 months!' I guarantee you that you'll be better off finding another way to target that same investment.  Along the lines of what mhoran said, if you aim for a basic 401K or other similar investment account and target it into the S&P500, you might see returns of anywhere from -25% to +25% over the next 24 months... but if things went like they tend to average for the S&P500, it's more like ~7% annually. Check out a ""savings target calculator"" like this one from Bankrate.com and put in the numbers... if you can save about $390 a month you'll be at $10K in 24 months. It's not as fun as the other, but you can actually expect to achieve that.  You will not find consistent >50% returns on your money annually." Here are my re-run figures.  Not counting capital gains taxes, I calculate you need to be making 1.875% per annum or 0.155% per month on your $8,000 investment to break-even on the loan.  It's interesting that the return you need to gain to break-even is less than the interest you're paying, even with commission.  It happens because the investment is gaining a return on an increasing amount while the load is accruing interest on a decreasing amount.    Ref. r, logarithmic return I think we are mixing this up. If you invest using loan, and are paying the loan out of your pocket and leaving the loan in investment, then there is no way you are making more money. Had you directly invested the same money in market instead of EMI, you would end up gaining more. Take a Loan of 100000, Year Int say 5.00%. Total Interest Paid in 2 Yrs comes out to 5291   The Rate of Interest your investments need to make is 2.58%. Sounds to good to be true. But yes when you look at it other way round, this is right.  Now if you can indeed make 2.58% from your investments, check what happens if you were to invest the EMI directly and don't take the loan.  You make 7937
If you've got the money to pay the bill today, do it. They are giving you a 25% discount if you do. You won't find an investment that will beat that.  Let's look at the details of your scheme.  Instead of paying $1696 today, you decide that you will pay $2261 over 60 months, or $37.68 per month.  You also decide to invest $1696 today, and expect to get 6% return each year. Your investment gets you $102 each year, but you have to pay taxes on that.  If you are in the 25% tax bracket, you only keep $76 (ignoring state taxes).  In addition, the loan is costing you $452 in payments each year. At the end of the 5 years, you will have paid $2261 to the hospital, and your $1696 investment will be worth about $2123 after taxes. Instead, let's say that you paid the hospital $1696 today, and invested the $37.68 per month.  At the end of 5 years, assuming the same 6% growth and 25% tax bracket, your investment will be worth $2552. In order for you to come out ahead by investing today and paying off the hospital over time, you would need to get at least a 17% growth on your investment.  If you are ignoring taxes, then the number you need to hit is at least 13%. Conclusion: You will come out ahead by paying the hospital today, and investing the monthly payment plan that you avoided. (Note: Bankrate has a very handy investment calculator that makes it easy to calculate returns on a monthly investment.) Now, let's look at the ethics of the situation.  Assume that you were able somehow to find an investment with a guaranteed return high enough to come out ahead with your plan.  Should you do it? The hospital has provided you a service, and you owe the money.  As a public service to people that cannot pay the bill, they allow people to pay off the bill over time at no interest.  However, you are not one of these people.  You have the money to pay.  It is not ethical, in my opinion, to use the hospital's money to invest and try to profit. Is that an FHA loan you have? And you're wanting to do one of those low cost FHA re-fi's, right? The answer is that in between when you first got that loan and now, the government's changed the rules on PMI for FHA loans. It more than doubled the amount of monthly PMI you have to pay.  The new rates, efective April 18th, 2011, as as follows: It used to be 0.50% per year for the 30 year. So that's why the PMI would go up.  There is another rule in play too, specific to that no-cost FHA refi -- the government requires that the combined (principal+interest+pmi) monthly payment after the refi is at least 4% lower than the current payment. Note that the no-cost refi does not require a new appraisal.  Some options present themselves, but only if you can show some equity in a appraisal: 1) if an appraisal shows at least 10% equity, you can go refi to a standard mortgage. You might even be able to find one that doesn't require PMI at that level. If you have 20% equity, you're golden -- no pmi. 2) See what the monthly payment will be if you refi to the 15 year FHA mortgage. Between the much lower PMI, and the much lower interest rates (15 year is usually about 0.75% less than a 30 year), it might not be much more than what you're paying now. And you'd save a huge amount of money over time, and get out from that PMI much earlier (it stops when your principal drops below 80% of the loan amount). This would require that reappraisal. First priority is to set up an emergency fund of 6 months expenses. If you're going to be making ~30k a year, then that means you'll probably want to put away about 10k of it in a savings account or something else similarly liquid.  After that, paying off your student loans probably makes the most sense depending on the rate. My general rule of thumb (and I'm sure others will disagree with me) is to pay off debts that are >=6.0% first before investing. Paying off debt is a risk-free return on your money, which makes it pretty valuable. It'll let you direct more of your monthly income into retirement savings, too. After that, open up a Roth IRA.  You can put a maximum of $5500 in it for this year.  I like Betterment, but Wealthfront has a similar service. Typically the power of capitalized interest would work in your favor and you could carry the loan paying it down while investing the original sum which would earn interest. BUT you aren't going to get any sort of return to compare with 15% so pay off that loan immediately. Also contrary to popular belief (and reiterated here) paying off incurred balance on your credit card every month is responsible use of credit but it will not do much for your credit score. The score ultimately means your ability to pay your bills and most importantly your willingness to pay interest, i.e. revolving the borrowed money. At least in the consumer market where the product they want you to buy is paying monthly interest charges. "Assuming the numbers you gave are forecasted 2013 annual income, you should really use an average and give the lender 1 number, as long as you can provide documentation to back it up. Lenders aren't as sophisticated as considering your monthly income fluctuations into their underwriting algorithm.  If you're not tied down to your existing lender, I highly recommend you to shop around. There isn't an ""universal lending requirement"". You'll be surprised at how flexible they are. Not as a recommendation to get around the rules, but just finding a lender that'll work with your situation. Try personal finance forums such as FatWallet or Slickdeal to find low-cost lenders: http://goo.gl/vIojT" "You are effectively 'making' 3.8% right now. By maintaining a loan at 0% vs the 3.8% you'd otherwise pay, you are ahead by that percent.  Now, if you borrowed at 3.8%, and made 7.6% on your investments, taxes aside, you'd break even. you are exactly ahead by the same 3.8%.  It seems to me that with a break-even of 7.6%, you'd be taking a risk based on the market return over the next few years. In a sense, that's true for any of us, but in your case, you are not deciding where to put idle cash, you already have the 3.8% option of ""leave well enough alone."" This is where I'd quote Harry Callahan - 'you've gotta ask yourself one question: ""Do I feel lucky?"" Well, do ya, punk?'" You can earn significantly more than 0.99% in the stock market.  I'd pay the $450/month and invest the rest in a (relatively conservative) stock market fund, making monthly withdrawals for the car note. Having a loan also represents risk.  IMHO you should retire the loan as soon as feasible in most cases.   JoeTaxpayer, as usual, raises a good point.  With numbers as he is quoting, it is tolerable to have a loan around on a asset such as a home.  While he did not mention it, I am sure that his rate is fixed. If the interest rate is variable:  pay it off. If it is a student loan:  pay it off. If you can have it retired quickly:  pay it off and get the bank off your payroll. If it is consumer debt:  pay it off.