Analysis - Using Personal Loan to Invest

The calls from my bank to push for personal loan is getting a bit out of hand these days. 

I guess with the record low lending rates nowadays, banks need more volume of retail loans to make up for the dip in profit. The sales pitch would go something like the following, "Get a personal loan right now at record low rates (5% p.a.), invest it all into stocks which are right now averaging more than 5% p.a., and PROFIT. Best of all, you are locked in at the record low rate for the rest of the repayment period!"

As a bored engineer with nothing better to do, I thought it will be a good idea to put that thought into excel. So in this first scenario, I am going to take up a RM 100,000 loan at a fixed rate of 5% p.a. for a 10 year (120 month) tenure. This RM 100,000 will then be placed lump sum into a bond fund that returns me 6% p.a. Theoretically, that should give me a net earning of RM 1,000 (1% of RM 100,000) at month 120. But is that the case though?

From the projection above, we see that at the end of the 120th month, this portfolio would end up at a negative RM 20,000. So what is the problem here? The issue stems from the RM1,250 fixed monthly repayment that has to be made on the loan! With normal investments, the interest compounds on top of the principal. 

However, in this 'scheme', the principal is continuously reduced from the monthly repayment of the loan. The interest is not given a chance to properly compound. So the next question would be, what is the required return of investment to have it break even (return zero) by end of the 120th month? The answer is 8.57% p.a. See below:

That is right. To break even on a 5% p.a. personal loan, we will need the investment to return 8.57%! This figure is multiplicative as well, i.e. to break even on a 10% p.a. personal loan, we will need the investment to return 15.8% p.a.

I guess what I learned from this analysis is that if I ever think of borrowing money to invest, I better be damn sure the investment makes a much larger return than the loan rate.