LOAN INVESTMENTS COME WITH LARGE HIDDEN FEES

Today, anything can be purchased with a loan. A house, a car, a TV set, furnishings for your apartment, even groceries. Shopping with money that is not ours has become an everyday aspect of our lives. The situation gets blurred even more thanks to the inventiveness and creativity of the financial institutions in the words they come up with to label loans. Terms such as mortgage, consumer credit, overdraft, credit and revolving card, instalment purchase or leasing – all of them always mean the same thing – a loan.

Make sure to do the maths

One can even invest through a loan. Margin, a Lombard loan or an overdraft: these are names that are often used for loan investment. We would like you to be alerted to a practice implemented in some institutions – we may as well call it “virtual loan investments”. So, what is it about?

A financial institution sells its client a share in a mutual fund for, say, a 100 thousand euro. According to the realistic scenario the institution presents, this fund can make the client 6% annually. Simultaneously, the institution offers the client a loan (an overdraft, for example) secured by this very mutual fund; the loan amounts to 80 thousand euro with 4% interest rate annually. At first sight, this is a great deal, right? It is, if we don’t take fees into consideration. As always, the devil is in the details. Let’s calculate who is going to laugh last at the end of the day.

Regardless of whether the mutual fund makes you money or not, the financial institution will make money on the administrative fee they charge you, e.g. 1.5%, that is, €1,500 per year. From the interest rate margin on the loan, the institution will gain, say 2% p.a., which is another €1,600 per year. This makes €3100 (that is, more than 3% of the investment amount). Besides all of the above, the client will also have to pay large entry fees and a loan processing fee.

Let us assume that the above mutual fund will perform at -4, 0, 4 or 8%. The client will invest the funds obtained from the acquired loan into a very attractive investment opportunity that will bring in -4, 0, 4, 8 or 12%. How will the client fare in the end?

Sometimes the client can be doing better, sometimes worse. Essentially, as a rule of a thumb, unless his or her total investment valuation exceeds 4% (the orange cells), the whole of this investment scheme is worth nothing to him or her.

Fees several-times lower

Let us, however, try to do the same but in a different way. From the 100 thousand euro you have, you invest 20 thousand in a mutual fund and the remaining 80 thousand into the above-mentioned attractive investment opportunity. How much will the financial institution earn on this particular scheme? Let’s do the maths.

The financial institution will earn €300 (1.5% x €20 thousand) on the administrative fee and zero profit on the loan margin. So, the total is €300, which is ten-times less in comparison to the previous example! Besides – the client will pay five-times less on the entry fees (you only invest one-fifth), and you pay nothing for the loan provision.

Let us now look at how the client’s going to fare with this alternative.

Well, the client is certainly better off now – he/she has lower potential losses and logically, also lower gains, but above all, pays lower fees! It is the fees that are among the key factors that significantly influence the value of any investment in the long-term perspective.

So, if any financial institution offers you a loan investment without you really needing this instrument or asking for it outright, you had better run away, and quickly! There is nothing else behind it, apart from their effort to ‘leverage’ a little more on fees and charges.

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Sending your contact data will allow you to access more information.

Granting your consent: Under Act No. 18/2018 Coll. On Personal Data Protection and on modification of and amendment to certain acts as amended (hereinafter referred to as PDPA) and General Data Protection Regulation (EU) No. 2016/679 (hereinafter referred to as GDPR), I check the field and press the “Send” button granting Across Wealth Management, o.c.p., a.s. with their registered seat in Zochova 3, 811 03 Bratislava, Company Reg. No.: 35 763 388, incorporated in the Commercial Register of the District Court Bratislava I., Section: Sa, File No.: 2079/B (hereinafter referred to as Operator) my consent to process my personal data in the following extent: name, surname, and e-mail address (hereinafter referred to as Personal Data) as well as for marketing purposes (especially sending the newsletter, sending offers and commercials regarding products and services of Operator as well as products and services of companies and partners of the Across Private Investments Group, for evaluation of clients’ satisfaction) (hereinafter referred to as Purpose).

Consent duration: Operator is granted this consent for the period of three (3) years.

Voluntariness: Granting this consent is fully voluntary. If this consent is granted by a person younger than 16 years, the consent with Personal Data Processing shall be granted by such person’s legal representative.

Revoking the consent: This consent with Personal Data Processing for the given Purpose may be revoked at any time in writing to the Operator’s address: Across Wealth Management, o.c.p., a.s., Zochova 3, 811 03 Bratislava or via an e-mail message sent to osobneudaje@across.sk. If the consent is revoked, Operator shall not process Personal Data for the given Purpose anymore.

More information for the data subject regarding Personal Data Processing can be found here.