How do I compare a loan's cost to my return on

2 min read

Return vs total costThe core comparison

Risk-adjust the returnNot best-case

Clear margin neededCost is certain

Same unitsPounds and %

Putting cost and return in the same terms

The decision to borrow for an investment reduces to one comparison: the total cost of the borrowing against the return the investment will generate. To compare fairly, express both the same way — as a total in pounds over the same period, or as annualised percentages. A loan costing 10% is worth taking for an investment reliably returning well above 10%, and not for one returning less.

Risk-adjusting the return

The crucial discipline is that the cost is certain and the return is not. So compare the certain cost against a risk-adjusted return — the return you realistically expect after discounting for the chance it disappoints — not the best case. An investment that might return 20% but often returns 5% should be judged nearer the 5%. Optimistic return figures are how sound-looking borrowing turns bad. See whether a loan pays for itself.

Requiring a clear margin

Because the cost is guaranteed and the return uncertain, you want the expected return to beat the cost by a clear margin, not to scrape past it. That margin is your buffer against disappointment. When the risk-adjusted return comfortably exceeds the total borrowing cost, the loan creates value; when it is marginal, the certain cost outweighs the uncertain gain and keeping the cash is wiser. See borrow or use cash.

Cost the borrowing on the true cost calculator, and when the return clearly wins, apply.

Frequently asked questions

What return do I need to justify borrowing?

A risk-adjusted return that clearly exceeds the total cost of the borrowing, with a margin to spare — not one that merely matches it. Because the cost is certain and the return is not, you want a comfortable gap so a disappointing outcome still leaves you ahead. Express both cost and return in the same units, and require the return to beat the cost even on cautious assumptions.

Should I borrow if the return only slightly beats the cost?

Usually not. A slim margin between an uncertain return and a certain cost leaves no room for the return to disappoint, and returns often do. Borrowing makes sense when the risk-adjusted return comfortably exceeds the cost, giving a buffer against a weaker-than-hoped outcome. If the numbers are close, the guaranteed cost outweighs the uncertain gain, and keeping the cash is the safer choice.