Investing in money markets involves a lot of different components and factors that must be taken into account. Flexibility in accounts like this is highly regarded among investment advice, such as the ability to both borrow and lend according to your wishes. Money market loans should have a short term as the risk of the borrower not paying you back increases over time.
Money markets are financial instruments with short terms, usually maturing in less than 13 months. They can be made up of various other kinds of financial instruments and, thus, there is a variety in the money market loan that you could offer or avail.
So should your pursue a money market loan?
Look out for the risks, be wary
Like hedge fund loans, money market loans can be used to attain immediate or, at the very least, temporary capital. While a hedge fund loan would charge you with exorbitant rates, the risk with money markets is that the rates are variable. You never know just how much you’ll get for a certain period of time. Only short bursts can be determined and this makes it hard for investment decisions to be made. And since money market loans are for short terms only, inflation can greatly decrease any gains you might have from what would otherwise be profitable returns.
With the variety of money market instruments, they’re a great way to invest your money and save up for the future. However, when you’re hard up for money, taking a money market loan might not be the best idea. Since returns are steady but not really that big, it would stand to reason that loans with variable rates might also give you less than what you really need. Other people turn to hardship loans or annuity loans since they usually allow access to up to half of the account balance but borrowing against your retirement savings or your personal savings might be even worse than going for money market loans.
Financial advisors and other business experts always caution that any loan taken against a retirement fund of some sort should always be your last resort. No reason to start chipping away at your nest egg when there might still be other avenues that can be pursued.
Where does money market funds come from?
Money markets, as mentioned before, can be comprised of a lot of different financial instruments which provide steady returns. They can be, but are not limited to, the following:
- Certificates of Deposit (CDs);
- repurchase agreements;
- treasury bills;
- and money funds
Money market loans have rates based on the current market scenario in the same way that mutual fund loans are. Not identically but definitely similarly. Money market funds are basically securities or shares that go up and down in price like stocks do. It should be noted that while money markets are preferred for the their steady returns, the SEC (Securities and Exchange Commission) has remarked that while losses have been rare, investors can still lose money to these kinds of investments. This is mostly due to the fact that when the rates go down, you might find that you’re in need of more money than you first figured.
Always keep in mind the variability of money market funds. These issues go double in importance for money market loans. Both the borrower and the lender should be careful of keeping to the terms in order to avoid unnecessarily bleeding money both ways.