Investing is a  way to build wealth and achieve financial goals, but it often requires large amounts of capital. If you lack funds for investment opportunities, borrowing money may be an appealing option.

Is it possible to invest in loans or financial loans for those who have limited funds? Of course, but there is a right time to do it. For example, when the return on investment (ROI) of a prospective investment is high and the level of risk is low, then borrowing money may be worth it. However, it is not recommended to invest in risky instruments, for example, the stock market or derivatives, which can put you at risk of loss.

Before you start borrowing to invest, especially from a licensed money lender in Singapore, there are several important factors to consider. These points will enable you to make the right decisions, help you manage risks, and maximise the potential benefits of your investments.

1. Understand and research your investment

Before you consider borrowing money for an investment, it’s essential to have a deep understanding of the investment opportunity. Research the market, analyse potential risks, and assess the expected returns. The more you know, the better equipped you’ll be to make informed investment decisions.

You have to define your investment goal by clarifying your investment objective. Are you looking for long-term or short-term to cover expenses that may come suddenly in a short time? These will shape your investment choices. 

By conducting thorough research, you can gain a comprehensive understanding of your chosen investment before borrowing money. This knowledge can help you make decisions that align with your financial goals and risk tolerance, making your investment likelier to succeed.

1. Assess your personal financial situation

Also, before borrowing money, you must consider assessing your overall financial situation. Consider your credit score, existing debt obligations, and available resources. By looking at these things, you can ensure the loan won’t negatively affect  your overall financial health.

1. Assess the investment risks

Every investment carries some level of risk, and borrowing to invest can amplify it. Identify the risks associated with your chosen investment by considering market risks, credit risks, and any unique risks related to the investment category. 

Also consider your risk tolerance and your ability to handle potential losses, and ensure that the added risk aligns with your overall financial goals. 

For example, if you are willing to invest in a real estate investment and you can accept the risk of an economic downturn, it means you have already acknowledged that it’s a long-term commitment with potential ups and downs.

1. Compare interest rates and costs

Licensed money lenders in Singapore offer various loan products with different interest rates and fees. It’s crucial to compare these rates and costs to ensure that your investment has the potential to generate returns that exceed your borrowing costs.

Evaluate the costs associated with and compare each loan product licensed money lenders have offered for your investment goals, such as management fees, trading commissions, and taxes. High fees can eat into your returns, so avoid making mistakes by reviewing the expense ratios of the mutual funds and exchange-traded funds (ETFs).

1. Review the terms and conditions of the loan

When you want to borrow to invest, you need to review the conditions that have been made by the money lenders you’re considering to loan from. It is very important to ensure that the loan is aligned with your financial goals and capacity, as well as specific investment needs.

For example, you are currently interested in building a tech startup in Singapore and want to borrow loans from a moneylender. Two moneylenders stop at you. Both Money Lender A and Money Lender B offer business loans for your tech startup.

The first thing you need to do is check the amount they’re willing to loan. Money Lender A offers a maximum loan amount of $100,000, while Money Lender B is willing to provide up to $120,000. Here, you must evaluate which loan amount offered suits your investment needs.

Second are interest rates. Determine whether your interest rate is fixed or variable and how it affects your monthly payments. A reduced interest rate can reduce the overall cost of borrowing significantly. Let’s say Money Lender A offers a fixed interest rate of 6% for a 3-year business loan, while Money Lender B offers a variable interest rate starting at 5.5% but subject to market fluctuations. This is the time for you to review interest rates and determine whether they are fixed or variable.

Third are the loan and repayment terms, which is the time span you will be paying the debt. In general, shorter terms have greater monthly payments but lower overall interest costs. Longer durations may result in lower monthly payments but higher overall interest payments.

Let’s say Money Lender A offers a loan term of 3 years with monthly instalments, while Money Lender B offers a term of 5 years with quarterly instalments. You should carefully review the repayment terms, including the loan term and repayment frequency (monthly, quarterly, etc.) according to your ability to repay.

Fourth are the additional fees. Money Lender A charges a 2% origination fee, a one-time fee imposed by money lenders when processing a new loan application to cover the administrative costs of underwriting, verifying, and funding the loan. Money Lender B does not charge an origination fee but does charge a 1% prepayment penalty if the loan is paid off early. Additional fees such as origination fees, prepayment penalties, or late  payment fees, are important to check to suit your needs.

1. Compare the total cost from each money lender

The next step is to calculate the total cost of borrowing from each money lender. Consider the principal amount, loan terms, interest payments, and all other fees.

For example, Money Lender A offers a personal loan with an interest rate of 8% per year, while Money Lender B offers a similar loan with an interest rate of 10% per year. Both lenders have a loan origination fee of 2%. 

Let’s say that you plan to borrow $10,000. Now that you’ve determined the amount you want to borrow, the next step is to compute the total cost. With Money Lender A, the total cost is $12,600 because of the principal loan of $10,000, 3-year interest (8% per year) of $2,400, and an origination fee of $200. For Money Lender B, the total cost for the same loan is $13,000 because of the principal loan of $9,000, 3-year interest (10% per year) of $2,700, and an origination fee of 2%. Let’s calculate both of them:

Total Cost Money Lender A = Principal (P) + Interest (I) + Origination Fee (F) = $12,600

Total Cost (C) = $10,000 + $2,400 + $200 = $12,600

Total Cost Money Lender B = Principal (P) + Interest (I) + Origination Fee (F) = $12,600

Total Cost Money Lender B = $9,000 + $2,700 + $200 = $11,900

Money Lender B has the lower overall cost for a $10,000 loan based on these estimates. Money Lender B’s total cost is $11,900, while Money Lender A’s total cost is $12,600.

So, in this scenario, Money Lender B provides the best bargain in terms of overall loan cost.

Compare the annual percentage rates (APR)

The third thing to consider  is the annual percentage rate (APR), which includes both the interest rate and any applicable fees. This provides a more accurate representation of the loan’s cost. The formula is as follows:

APR = [(Total Interest + Fees) / Total Loan Amount] / Term

For example, the APR on Money Lender A is 8.67% from the sum of interest (8% per year) of $2,400, the origination fee of $200, the total loan amount of $10,000, and the loan term of 3 years. If we calculate, the formula to find APR of Money Lender A is:

1. Find Total Interest:

Total Interest = Principal Loan x Annual Interest Rate (in decimals) x Loan Term

Total Interest = $10,000 x 0.08 x 3 years = $2,400

1. Add any fees to the total interest to find the total cost of the loan:

Total Cost = Total Interest + Origination Fee:

Total Cost = $2,400 + $200 = $2,600

1. Calculate the average loan amount:

Average Loan Amount = (Principal Loan + Total Cost) / 2

Average Loan Amount = ($10,000 + $2,600) / 2 = $12,600 / 2 = $6,300

1. Total the APR

APR = (Total Cost / Average Loan Amount) x (365 / Loan Term) x 100

APR = ($2,600 / $6,300) x (365 / 3) x 100

APR = 50.17%

On the other hand, Money Lender B’s APR is 10.67% from the sum of interest (10% per year) of $3,00, the origination fee of $200, the total loan amount of $10,000, and the loan term of 3 years. If we calculate, the formula to find APR of Money Lender B is:

1. Find Total Interest:

Total Interest = Principal Loan x Annual Interest Rate x Loan Term

Total Interest = $10,000 x 0.10 x 3 = $3,000

1. Add any fees to the total interest to find the total cost of the loan:

Total Cost = Total Interest + Origination Fee

Total Cost = $3,000 + $200 = $3,200

1. Calculate the average loan amount:

Average Loan Amount = (Principal Loan + Total Cost) / 2

Average Loan Amount = ($10,000 + $3,200) / 2 = $13,200 / 2 = $6,600

1. Total the APR:

APR = (Total Cost / Average Loan Amount) x (365 / Loan Term) x 100

APR = ($3,200 / $6,600) x (365 / 3) x 100

APR = $58,92%

A lower APR generally suggests a more cost-effective borrowing alternative. When comparing the borrowing costs of the two lenders, Money Lender A is the more advantageous alternative.

1. Check your debt service ratio (DSR)

As a measure of the percentage of your income used to service debt obligations, the debt service ratio (DSR) can evaluate your ability to manage loan repayments. The way to get the right DSR calculation is by providing information about your current income from all sources.

Let’s assume your gross monthly income from work, rental property, and other sources totals $6,000. You have debt payments in the form of a mortgage of $1,500, a car loan of $400, a credit card minimum payment of $250, and a personal loan of $200. That’s a  total monthly debt of $2,350.

To calculate your Total Debt Service Ratio (TDSR), divide your total monthly debt payments by your gross monthly income and multiply the result by 100 to express it as a percentage.

DSR = (Total Monthly Debt Payments / Monthly Gross Income) x 100

From this example, your debt service ratio (DSR) is approximately 39.17% of your gross monthly income used to pay your current debt obligations.

According to the Monetary Authority of Singapore, borrowers must have a TDSR below or equal to 55%. This means that your TDSR number is still considered healthy. This indicates that you have a reasonable amount of income for potential new debt obligations and may impact your ability to take on additional debt for your investments.

A low TDSR indicates good creditworthiness. It implies that you can manage your cash wisely and are less likely to face financial difficulties. Borrowers with good credit are more likely to get better conditions from lenders.

Enhance your wealth without being reckless about borrowing

Borrowing money for an investment can accelerate the achievement of your wealth-building goals. However, you should approach it with careful consideration and planning. And while you can get the money from licensed money lender in Singapore,, you must first diligently evaluate the risks and rewards abnd determine if the investment is worth borrowing money for.