Should You Use A Personal Loan To Invest

 

Is it a good idea to use a personal loan to invest in financial products, such as the stock market? It might have been an idea that strikes out to you to try to obtain a personal loan to invest in such liquid products that give you good solid returns on investments. But it may not be ideal.

You may have heard of the ability to earn and profit from the stock market and make some lucrative money out of it. As tempting as it sounds, it may lead to grave consequences if not properly managed.

This works true even if you have not much cash on hand immediately. Yes, you may try to get ahead in the fastest amount of time. But here is what you need to take note of when using a personal loan to invest in the equities.

Personal loans function as unsecured type of loans with unsecured debt. The financial institution lending you cannot force a foreclosure on your home if you do not make repayments. As unsecured loans tend to have higher interest rates than secured loans, if you default on the personal loan, you may be in deep financial trouble. The lender will be at greater risk.

As you have to make monthly payment on your personal loan, you must hope that the investment can provide you with a fair amount of returns to pay off the loan, including its interest rate charges and other fees. It can be possible for the investment return to exceed the interest charges but it does not always occur as the financial market can be very volatile. This is especially a temptation if the stock market rebounds after a crash. Sharp gains may be realised for the next few weeks and they may exceed the costs of personal loans. However, all is uncertain still.

No one is stopping you from using a personal loan to invest, unless the financial institution has special instructions for it. Some personal loans come with lower interest rates because this will result in lower risks for the lender. 

It is good for you to use your personal loans to invest provided you are very confident that the stock market is going to help you collect higher returns that will exceed your costs. But then, a personal loan to be used for investment is still not a good idea.

Fixed terms are in personal loans. They are relatively short. This can be not useful for investment which usually needs a longer term to realise its goodness. Investments do vary yearly and short term returns are just not so predictable.

As personal loans do come with higher interest rates than those for mortgages, they add to the overall costs. You need a longer period to overcome high volatility in investments. The interest payments may cost you more and even with the returns, it is not achievable for a positive net result.

Read more about investments out of personal loan - https://www.investopedia.com/ask/answers/09/take-out-loan-to-invest.asp

To do investments out of loans, consider an investment loan which is specialised specifically for investments per se. Licensed moneylenders do provide investment loans.