A reader recently emailed me explaining he was considering applying for a 0% interest credit card, maxing out the limit and using the borrowed money to invest into peer to peer lending. He asked me if I thought this was a good idea.
On paper, borrowing money on a credit card to reinvest in any medium looks like it would make sense. Borrow at 0%, invest in peer to peer and make a tidy 12% return. But for me, reality paints a different picture. Between the years of 2005 and 2007, I borrowed over £500,000 to buy a few bits of property and some development land. Then came the property crash of 2008 / 2009 where I suffered substantial financial losses, (story on this to come).
Until you’ve suffered the pain of financial loss, you can’t truly appreciate the dark side of risk. Because of my experiences, I’m rather risk averse and would never recommend borrowing money on credit cards to invest.
People who leverage credit cards to invest usually disregard the risk involved. But what if something happens in your life and you’re unable to pay the credit card company back? What if you lose your job or are unable to work due to illness? What if the peer to peer company you invest in goes out of business? What if there’s a large stock market correction right before the balance of your credit card is due? What if BP spills oil over Skegness beach, tourists stop visiting Skeggy and the confectionary company shares you bought sees a drastic fallout in rock sales….
You get the idea.
Back in the roaring 1920’s, people were borrowing money to invest in the stock market. The high returns looked as if even the most inexperienced investor could make a fortune. And they did for a while, until the stock market crash.
When thinking about leveraging credit cards to invest, consider this. If you can borrow £1,000, why not borrow £100,000 or £1m to invest? Most people would start look at the £1m figure and become uncomfortable borrowing that amount. Why? Because of risk.
So should you borrow on credit cards to invest? Not if you like to sleep peacefully at night.
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** This page is for information purposes only and should not be considered investment advice. Opinions expressed in this review are based upon my investing experiences. All information was deemed to be correct at the time of writing. Peer to peer lending contains risks so never invest more than you can afford to lose. **