Calculating potential returns (with or without loan)

The following example illustrates the difference between an investment strategy with a loan (leverage loan) or without a loan.

Example of potential returns (with or without loan)

Calculating potential returns	With $25,000 loan	Without loan
Returns	10%1	10%
Principal on hand	$5,000	$5,000
Principal invested	$30,000	$5,000
Earnings	$3,000	$500
Borrowing rate	7%1	0%
Tax deductible loan interest	$1,750	N/A
Earnings less interest charges	$1,250	$500
Returns on principal on hand	25%2	10%

As you can see, potential returns on the same $5,000 investment are higher using a leverage strategy (borrowing to invest). On the other hand, the potential for loss is equally as high. Each case must be evaluated separately.

1. "Earnings" and "borrowing rate" are provided as examples only and do not necessarily reflect the market.
2. 25% is the result of dividing net earnings ($950) by the principal on hand ($5,000).