top of page

Can You Borrow at 8% and Invest at 7% – And Still Make a Profit?

When it comes to managing money, one golden rule often repeated is: “Don’t borrow at a higher rate to invest at a lower rate.” On the surface, that sounds obvious. But real-world financial decisions aren’t always that straightforward.

Let’s explore a counterintuitive scenario where, surprisingly, you can make a profit even if your loan interest rate is higher than your investment return.


Borrow and Invest

The Scenario

Suppose you:

  • Take a loan of ₹10 lakhs at 8% per annum, with monthly EMIs over 5 years.

  • Simultaneously invest the ₹10 lakhs in an instrument that gives 7% annual return, compounded yearly.

You might be thinking — “Why would anyone do this? The loan is at a higher rate!”

Let’s break it down with real numbers.


Outflow: What You Pay on the Loan

At 8% interest, a ₹10 lakh loan over 5 years results in a monthly EMI of approximately ₹20,276.

Total outflow over 5 years = ₹20,276 × 60 months = ₹12,16,590

So, you pay ₹2,16,590 in interest over the loan tenure.


Inflow: What You Earn from the Investment

Now, let’s see how your investment of ₹10 lakhs grows at 7% per annum (compounded annually).

After 5 years, the investment becomes:

₹10,00,000 × (1.07)^5 = ₹14,02,550

That’s a gain of ₹4,02,550 over 5 years.



Net Result: Profit or Loss?

Description

Amount (₹)

Total Investment Value

₹14,02,550

Total Loan Repayment

₹12,16,590

Net Profit

₹1,85,960

Yes, you read that right — despite borrowing at 8% and investing at 7%, you end up with a profit of nearly ₹1.86 lakhs!


How Is That Even Possible?

This boils down to the power of compounding vs. amortization:

  • Your investment grows on the full ₹10 lakh for the entire 5 years.

  • Your loan is repaid gradually through EMIs — meaning your interest is charged only on the reducing balance.

So while the headline rates are 8% vs. 7%, the actual effect of money over time works in your favor.


But Wait… Should You Try This?

Not so fast. While the math works in this ideal scenario, here are a few things to keep in mind before considering such a strategy:

✅ When It Might Work:

  • You have access to low-interest loans (like education or home loans).

  • You're investing in safe, long-term instruments (like PPF, certain bonds).

  • You can commit to long-term holding without touching the investment.

  • You're comfortable handling both the EMI obligation and market volatility.

❌ When It’s Too Risky:

  • You’re investing in volatile or illiquid assets.

  • You don’t have a steady income to manage EMI payments.

  • The investment carries taxes or hidden costs that eat into returns.

  • Interest rates change unexpectedly (in case of floating-rate loans).



Personal finance isn’t just about chasing the highest returns or lowest rates — it’s about understanding how cash flows work over time.

This example shows how the structure of repayment and compounding mechanics can lead to surprising outcomes. It doesn’t mean you should always borrow to invest — but it does highlight the importance of running the numbers, not just relying on intuition.

Next time you’re weighing a loan against an investment, dig a little deeper. The math might surprise you.

 
 
 
bottom of page