Key Takeaways
- Personal loans can be used for many things including investment opportunities among other things.
- It is a good idea to take out a personal loan to invest as it is an effective way to put your money to work and potentially build wealth. However, it can also be dangerous if you’re investing in volatile investments
- Investing involves risk, including a possible loss of principal, so investors should consider asking for financial advice from professionals to determine the best investment strategy
If you’re considering taking out a personal loan to invest, you may wonder whether it is a good idea. There is an element of risk with any investment and adding debt to that risk may seem a step too far for some. However, borrowing money to invest can sometimes be worth the risk.
There are several things to consider before taking out a personal loan for investment. Borrowing to invest is a high-risk strategy and may result in you losing more than your invested capital. Before taking out an investment loan, ensure that you can afford the costs associated with the loan, including repayment of the loan.
If you’re still curious about the pros and cons of investing by taking out a loan, then continue reading.
Can You Use Personal Loans to Invest?
Yes. Personal loans allow you to borrow a lump sum of money that you can use for any purpose. It includes home improvements, debt consolidation, car purchases, emergency expenses, and medical bills. But you can also use this type of loan for investing. There are several reasons why you may want to take out personal loans to invest. Some lenders offer low-interest rates, which makes the cost of borrowing cheaper. Some investors also don’t have other cash available to invest meaning a personal loan provides an opportunity that would otherwise be inaccessible.
The decision to use personal loans for investing is often personal and will depend on your investment and financial goals.
The pros and cons of borrowing to invest
Taking out a personal loan to invest is a good idea if you want to make some extra money and start building up your savings. However, if you put the money into an investment that you won’t be able to withdraw in the near future, you may struggle to make the repayments especially if you don’t have extra expendable income. Below are some of the pros and cons of borrowing to invest.
Pros
- You get to take advantage of low-interest rates
Depending on your credit score, you may be qualified for a personal loan with a low-interest rate. If this is the case, then the interest charges you pay can be less than your return on investment. In short, you can make money on your debt. This is why it’s important to have a good credit score and credit history. If you do have excellent credit, you’ll have better chances of getting low-interest rates.
- You may be able to pay the loan amount off early
Personal loans can be used to purchase stocks, real estate, and mutual funds. Furthermore, being able to pay off the investment loan early might also help you save money. So, consider your budget and how much you can afford to pay each month.
- You can increase your potential profits
If you borrow money to invest specifically in stocks or real estate and they rise in value, you will receive the benefit of that gain on your initial investment when you sell the asset. You also profit from any dividends, bonus share issuance, or rentals paid while you control the asset.
Cons
- You may not qualify for the best rates
If you don’t have an excellent credit score, then any investment returns may be overshadowed by the amount of interest you’re paying to the lender. The total interest rate increases the longer you pay on the loan, which is something that you should keep in mind before you consider the length of repayment. Check your credit reports and ratings before applying for a personal loan to see where you stand. This might help you determine what kind of interest rates you’re most likely to qualify for if you decide to proceed with the loan.
- You have a low tolerance for risks
Investments are not risk-free, and some are riskier than others. Before taking on debt to invest in the market, you must be certain that your investment will pay off. Volatility can affect and change prices since stock prices move in cycles. Before taking out a personal loan, you should understand how you generally respond to volatility and what degree of risk is acceptable to you.
- Your expenses and income could change
Taking out a personal loan means you’re committing to repaying the money. While you might be able to afford payments now, that may not work out if your income or expenses change. So, before asking for an investment loan, consider whether you’d still be able to make the payments if your income decreased, your other costs increased, or your investment didn’t provide the expected return.
Things to consider before borrowing to invest
- Investment knowledge
Before you borrow to invest, you need to consider your investment knowledge. Personal loan lenders would want to lend money to someone who is not knowledgeable about how to use the funds they receive and how long it will take for them to generate a return. They would also give loans to someone who understands that there are risks involved in investing.
- Current loan rates
You should also check out current loan rates before investing. It’s because your current loan rates will impact the amount of money you can invest. If you’re paying a high-interest rate on your loans, it may be difficult to save up enough money for investments and still pay your monthly bills.
- Financial portfolio
You also need to consider your financial portfolio. A financial portfolio is a collection of all your assets and debts, including the value of any investments you might have. You’ll want to have a mix of different asset classes in your financial portfolio to balance the possibility of growth and the risk that you’ll lose money.
- Your risk tolerance
Before you decide to borrow to invest, you need to think about your risk tolerance. If you are looking to take on a substantial amount of debt, then you must understand what type of financial position you are putting yourself in. If you have a high tolerance for risk, then investing in the stock market may be right for you. However, if you don’t have a high tolerance for risk, then borrowing to invest may not be the best option for you.
- Tools for Investing Success
- InvestSMART: a free-to-use portfolio management service that allows investors to track and manage their share portfolio through their Portfolio Manager service. Customers may use the app to create and store portfolios and watchlists for broader performance reporting. It also provides share market research and content as well as investment filters, ideas, and recommendations.
- SelfWealth: this app allows customers to buy and sell shares, view and adjust orders, view their order history, analyse their stocks, estimate earnings, and more. It’s suitable for self-directed investors who have experience when it comes to trading.
- Stocklight – ASX Stock News: this app is one of Australia’s most downloaded share market apps. It allows you to track dividends, news, and announcements for stocks, find investment opportunities using advanced filters, and access recommendations from industry experts based on analysis.
- Raiz: A micro-investing app that automatically invests your spare change into a diversified portfolio or exchange-traded funds which makes it easy for investors to grow their wealth. It targets young investors who are tight on money and are not ready to invest large sums of money.
The bottom line
It may be tempting to take out an online loan to invest in your future, but the benefits do not outweigh the risks of this strategy. Instead, consider saving longer and working on carving out some extra cash to invest on a smaller scale. When making investments, always do your research even if that requires working with a financial planner, and ensure you are comfortable with the entire process before committing to it. Making rash decisions can lead to hundreds, if not thousands of dollars wasted each month if you have no plan or strategy in place.
Considering all of the factors, it would be worth looking into this option as long as you understand the risks and decide if it is right for you.
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