I work at a bank, where one of the perks is access to very low interest rates on loans.
You can probably guess where this is heading I am able to take out personal loans between $5,000 and $30,000 at a fixed interest rate of 2.5% to 3%.
What are the potential downsides of investing in high-yield bonds (4% to 6%) that offer monthly payouts?
The downside is the risk involved. If the bonds you purchase default, you are still responsible for repaying your loan. So, your upside is 2% on $30K, which equals $600 a year, while your downside is the entire $30K. If that scenario works for you, then go for it.
The OP can simply buy treasuries or corporate ETFs with minimal risk. If treasuries were to default, the OP wouldn’t have to pay back the loan because the bank would mot exist anymore. 
This person is not in the usa. There is currency valuation risk if they buy us treasuries.
That is, in my opinion, more of a feature than a flaw.
Since its founding, the Euro has continuously undervalued the US dollar, as has nearly every other currency, and they are members of the European Union.
When it comes time for them to cash out their bonds, the dollar’s value relative to their own currency is all that counts. And that has no general tendency, it is a complete crapshoot.
A high-yield bond fund might experience some loss of principal, but unless there’s a significant disaster like one that would prompt central banks to print money to “rescue” the situation, most of the bonds should perform well. There is some risk involved, but it’s unlikely that you’d lose everything, I’d guess you would at least break even.
It is possible that the interest is taxable. Your after-tax rate can be lower than the loan rate if you are unable to deduct the interest paid on the loan from the interest earned.
If the loan is in dollars, you should pull out as much as you can to purchase current 4.6% 1-3 month T-bills. The markets are liquid and convexity risk is nonexistent. If you are genuinely able to obtain such a loan, it’s a free money exchange.
I have enough cash to pay off a $300,000 mortgage at 3.625% with monthly payments. Since the money is currently sitting in a money market account earning 4.87% monthly, why should I pay off the mortgage and give up that easy, free money? I will hold off on paying off the mortgage until the interest rate on that easy money drops below 3.625%.
Don’t go down this path, OP. The potential reward is minimal, and the biggest risk is that you might later decide to invest in crypto or another get-rich-quick scheme because a great opportunity arises.
This happens every day new investors often become their own worst enemies. You might think you’re not that kind of investor now, but I’m sure many others felt the same way at one point too.
Don’t go down this path, OP. The potential reward is minimal, and the biggest risk is that you might later decide to invest in crypto or another get-rich-quick scheme because a great opportunity arises.
This happens every day new investors often become their own worst enemies. You might think you’re not that kind of investor now, but I’m sure many others felt the same way at one point too.
Go forward if you genuinely think it’s a good idea. If you don’t need the money right away, the lock-up period shouldn’t be a problem.