Reasons Why You Should (or Shouldn't) Take a Personal Loan for Investments

Financial literacy is essential to thrive and achieve your financial freedom. If you're someone who wishes to achieve their financial freedom, you should understand the basics of investment and various financial tools. You must ask questions like What is FTSE 100 or how does stock market operate or is it wise to take loan?

Today, obtaining a Personal Loan is now easier than ever, mainly because lenders give the funds digitally, and it involves less than a few minutes to receive the money in the account. Nearly all of our daily needs can be met with a personal loan, which is an unsecured loan that can be obtained without any type of security. It has become one of the most popular forms of loans, especially among young and middle-aged people.

This leads us to address the common dilemma, should you take personal loans for investment purposes?

Why do investors choose a Personal Loan for investing purposes?

Leveraging is the process of investing borrowed capital in securities such as stocks, mutual funds, and so on. When it comes to 'leveraging,' there are two primary opinions. Some investors firmly consider that using leverage to generate a higher rate of return in a short period of time is beneficial, but others view it as a highly risky endeavor.

Here are a few factors why investors try taking out a Personal Loan for investing purposes:

Maximum Capital: The more money you invest, the bigger your returns will be. As a result, many investors prefer to borrow money to maximize their returns in a short period.

Quick and Simple Process: Most investors demand funds instantly, particularly if they put their money into stocks. In this case, a personal loan can offer them finances quickly and effortlessly.

No Collateral Requirement: Because personal loans don't demand collateral, there is no threat of losing the asset or collateral if you can't pay the loan back.

Flexibility: Many loans specify the purpose for which the loan proceeds may be used. Borrowers can use their personal loan money for nearly anything as long as it is legal. So, you can utilize this money for your child's education, house improvement, purchasing an expensive item, investing it further to make returns, and so on.

What are the disadvantages of investing with a Personal Loan?

While there are several reasons why taking a personal loan for an investment purpose might be considered a bad idea, here are the major risks associated with the thought:

Risk of Losing Money: There is always a danger that capital invested in the stock market, mutual funds, IPOs, and other equity-related financial instruments will not generate projected returns or, in the worst-case situation, you will lose the cash fully or partially.

High Interest Rate: If the interest rate on the Personal Loan that you have taken is particularly high, you may not be able to generate enough profit to repay the amount of the loan in the short term of the loan.

Furthermore, because personal loans are typically issued with a fluctuating interest rate, they may rise at any point after the loan is taken out.

Short Loan Terms: Personal loans are normally for one to five years. If you are looking for long-term gains, you will be unable to repay the loan within the loan term.

Furthermore, with a high rate of interest and a service charge, the cost of a personal loan becomes quite expensive, which is difficult to attain through short-term investments.

When is it advisable to obtain a Personal Loan for investing purposes?

Leveraging with a Personal Loan is advisable only when your investment opportunity fits all of the following criteria:

When the predicted period of the returns is shorter than the loan term.

When you are absolutely confident in your investment choices.

When you use the funds from your personal loan to invest in an asset that generates returns that exceed the cost of the loan.

When returns are assured or there is minimal/no risk of capital loss.

When you have an alternative method to repay the loan in the event that the returns are lower than anticipated.

Why is taking out a Personal Loan for investing not a smart strategy?

As previously indicated, investing borrowed cash in riskier investment options such as shares, IPOs, mutual funds, and so on makes no sense.

While debt-oriented schemes and fixed deposits, for example, provide assured returns, they will need more than sufficient returns to reimburse the cost of the loan.

Furthermore, because small-cap and penny stocks are highly volatile, investing your personal loan amount in them is not recommended.