Shawn H asked in Business & FinanceInvesting · 7 years ago

Would There be a good ROI from investing a loan?

I'm looking at the ROI in investing a loan in one year vs. saving the payments and investing each month. While it is risky I'm interested in what the numbers might look like.

Loan is $4,000 at 4.95% taken out Jan 1st. If divide the annual interest by 365 and compound monthly I get around $34 in interest just for the first year.

( 4.95% / 365 ) x # days in month x principle is what I used

So cost of the loan is $34.00 if I can pay if off in a year.

On January 5th, I invest the loan across four mutual funds.

Fund A - $18/sh - $1,000

Fund B - $25/sh - $1,000

Fund C - $15/sh - $1,000

Fund D - $22/sh - $1,000

Total cost of placing orders = ($35.80)

All funds return at least a .30/share dividend each quarter and reinvested.

On December 15th, all funds have risen at least 2 points each.

Funds will not be sold.

Does this seem like a practical assumption that there would be a decent ROI that would cover the expenses of the loan and placing market orders?

I'm looking for some solid numbers and reasoning.

Thanks!

Update:

The interest on the loan is calculated on a declining balance over the course of the year making $400.00 payments from an alternate income source, not from proceeds from the investment. There are three investment strategies to compare:

A) Financing the purchase of an asset (estimated to appreciate) starting Jan. 1

B) Investing $400 each month for a year avoiding finance charges but incurring additional brokerage fees

C) Saving $400 each month in a money market account and then investing the following year, offsetting any possible gains for a year

1 Answer

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  • 7 years ago

    First off, 4.95% x $4,000 = $198.00 interest. I don't follow your calculation but it is wrong.

    Your dividends would have to be in the 6% annual range to return 30 cents per quarter. I doubt that will happen. I would use 3% or half of what you assume, and that is still high.

    You would make some money on appreciation of funds, assuming they will go up $2 over the year. You own roughly 50 shares of each so you would make $400. Plus the dividends of 3% on $4,000 or $120, now you are at $520. Your fees are $198 for interest and $36 for commissions. So you made about $286 or 7.15% return.

    Of course there will be taxes to consider, how will you pay back the loan if you don't sell your mutual fund shares?

    With all of the uncertainty (you are assuming nearly 10% increase in fund price for one thing), I would say it isn't worth the hassle.

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