Investing Borrowed Money Can Be Risky

Investing Borrowed Money Can Be Risky

You're getting into risky territory when you start investing borrowed money. At first glance, your plan may seem like an easy way to use the bank's money to easily rack up investment gains for yourself.

After all, you can probably get a home equity line of credit at or below the prime rate, which is now 8.25 percent. Assuming the interest on the loan is tax-deductible (which you can ascertain by checking out IRS Publication 936), you're actually paying 6.2 percent in interest after taxes, assuming a 25 percent tax rate.

So all you've got to do to come out ahead is earn more than 6.2 percent after-tax on the borrowed money you invest.

Some may think that sounds like a sure thing. But actually, several things could go wrong.