While it can be alluring, taking a personal loan to invest comes with many risks. In addition to the possibility that your investments could lose value, you will also be required to pay interest on the loan.
You may be thinking of getting a personal loan to invest nonetheless. Getting a personal loan may provide you access to the money you need, whether you need to invest it in stocks or there is a real estate investment opportunity you believe is too excellent to pass.
When Does Using a Personal Loan for Investments Make Sense?
Why is getting a personal loan to make stock market investments so alluring? Personal loans can give you quick access to money if you qualify. They are generally unsecured. Therefore you are not required to provide collateral to secure the loan.
Instead, money lenders consider your income, credit history, and credit score when deciding whether to grant you a loan. These factors also influence the interest they charge. In addition, personal loans provide one-time access to a lump sum of money.
You may get a personal loan up to a particular amount depending on your creditworthiness. Processing a personal loan is quick, and some money lenders even provide the option of same-day funding.
Using a personal loan for investment may make sense in some particular circumstances. You can take the help of tools like a personal loan calculator to calculate your monthly EMI burden.
Here are three situations where it can be beneficial:
1. You Can Use Your Good Credit Score to Get an Affordable Interest Rate
What you spend on interest charges may be less than your return on investment if your personal loan request gets approved at a low-interest rate. You’ll be making money off your debt in this way.
The lowest interest rates are often only offered to candidates with stellar credit histories and ratings. You will have a better chance of obtaining a loan at a lower interest rate than an individual with a lower credit score. To get a loan with a lower interest rate, maintain an excellent credit score. A CIBIL score between 720 and 750 is a good score for obtaining a personal loan. A CIBIL score of more than 750 is considered excellent and helps you get a loan at a much lower interest rate.
Make sure to compare offers and review the lender’s terms before applying. You may view loan offers without affecting your score with a soft credit check from many lenders. To decide the money lender for your personal loan, compare different money lenders’ APR, loan fees, monthly payments, and loan tenure.
2. Your Investment May Increase Your Income
If you are that you are borrowing money to make more money, using a personal loan makes sense. It can be smart if the loan helps you launch a firm that can immediately start paying you.
You can use a personal loan to pay for professional training or certification to boost your value on the job market. You can also spend this money on tools or software you’ll need to start a firm.
3. You are Confident about Your Investment and Can Bear the Risk
Risk can be and handled to your advantage. Finding future trends in a specific stock can help you profit and increase returns. you can use credit, such as personal loans or margin loans, to invest in promising stocks and increase your returns.
Riley Adams, a senior financial analyst at Google and a certified public accountant, did the recently. He bought more of a stock that he already owned using a margin loan, which enables you to borrow money against your securities’ value. He initially conducted research. He read through financial reports and performance measures of the company he intended to invest in and its rivals to appropriately determine the risk. He claimed that he got a strong impression that the equity would go up soon after reading many of the entity’s earnings call transcripts, press releases, and news releases. He even considered their drawbacks.
In the end, Adams’ bet turned out to be correct, and his profits allowed him to pay back the margin loan. His story demonstrates that borrowing money to invest may be profitable and offers other investors a solid example to follow. But, meticulous research about the stock’s prospects is necessary before making such a move.
When Does a Personal Loan for Investing Not Make Sense
There are a lot of risks involved with this method, even if taking out a personal loan to invest can be advantageous in some circumstances.
Risk cannot be avoided because none of us can make accurate predictions. Therefore, effectively managing it is essential to successful investing.
As you have to deal with interest rates and debt payments, borrowing money to invest is particularly risky. Following are three reasons why taking out a personal loan to support your investing journey may not be a smart move:
1. Your Investment May Fail, But You Will Still Have to Repay the Debt
The inherent risk of investing increases if you use borrowed money or a personal loan for your investments.
It will be disappointing if your investment loses value when you invest with cash. But, you will have to bear much more burden when paying back your loan after you have already incurred a loss in the asset’s value.
You may end up owing more on your loan for the investment than you might recoup by selling it. This situation is known as being “underwater.” You may find it challenging to repay the loan, and your monthly budget will be disrupted.
2. The Interest You Pay May Exceed the Returns You Receive
The cost of interest and the difficulty of making monthly payments come into play when you use personal loans for investments. As a result, your return on investment must also increase proportionately to offset this higher capital expenditure.
To avoid losing money, the growth of your investment must be greater than the APR of your loan. For instance, you will need to generate at least a 10% return on your investment to justify a personal loan with a 10% APR. Otherwise, you will be making losses.
3. Your Payments Could Become Unaffordable.
Regardless of how you use it, debt puts your finances in danger. This is so because every time you borrow money, you agree to repay it with interest at a later time.
You’ll have to make a monthly payment until the debt is paid off, depending on the amount you borrow and the conditions you select for the personal loan. You’ll need to budget for the payment until the loan is fully returned as an addition to your monthly expenses. You cannot always ensure that you’ll be able to pay back a personal loan. Any financial emergency can catch you off guard and your financial planning will be disrupted.
Un events may make it challenging to finance your monthly payments. These events can range from common problems, such as job loss, to major catastrophes like the recession. Such events will have a cascading effect on your finances and force you to face even worse consequences. If you default on the loan, your credit score will be hampered significantly. As a result, your prospects of getting another loan will reduce drastically. To avoid stretching your finances too thin, avoid taking out unnecessary loans.
Other Investment Alternatives
It is always a good idea to consider various investment alternatives to expand your portfolio. You can invest in safer options such as fixed deposits and government bonds. Consider investing in stocks if you have a high-risk tolerance. One of the investment opportunities made possible by technology, which has been expanding quickly, is P2P lending. The Fractional Matchmaking Peer-to-Peer Plan from LenDenClub 100% investors have earned between 10 to 12% p.a. based on returns earned in Sep., Oct., and Nov. 2022.*