Using a personal loan to invest can be tempting, but it can carry significant risk. Not only is there a chance that your investments will lose value, but you'll also have to pay back the loan with interest.
However, you can consider getting a personal loan to invest anyway. Whether it's a real estate investment opportunity you don't want to miss out on or you simply want to invest in stocks, getting a personal loan can give you access to the cash you need.
Here's what you should know before using a loan to trade stocks or other investments.
- •It can be useful when using a personal loan for investments
- •If you are using a personal loan to invest, it may not make sense
It can be useful when using a personal loan for investments
Why is it so attractive to take out a personal loan to invest in the stock market? Depending on your suitability,personal loanscan give you quick and easy access to cash. They are generally unsecured, which means you do not have to secure the loan with collateral.
Instead, lenders look at your credit score, credit history, and income to decide whether to lend to you and determine your interest rate. not aspersonal lines of creditPersonal loans give one-time access to a lump sum of cash.
Depending on your credit score, you can get a personal loan of up to $50,000 or more and have up to 12 years to repay the loan (depending on the lender). Personal loans can be processed quickly and some lenders even offer same day financing.
There may be certain situations in which it makes sense to use a personal loan to invest. Here are three scenarios where it could pay off:
1. You can use your good credit to get low interest rates
If you can qualify for a low-interest personal loan, your interest cost may be less than your yield. This is how you make money from your debt.
Some of our personal loan partners offer an APR as low as 2.49%. However, lenders often reserve their lowest interest rates for applicants with excellent credentials.credit scoresand credit histories. If you have excellent or exceptional credit, meaning your credit score is 740 or higher, you have a better chance of getting low interest rates compared to a borrower with a lower credit score.
Convince yourself before applyingcompulsive buyingand check the terms of the lenders. Many lenders allow you to prequalify and view loan offers with a smooth credit check, which doesn't affect your score. Compare the APR, loan rates, monthly payment, and length of the loan to determine if you want to make a formal application to a lender.
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Above:Not all lenders allow borrowers to use private loan funds for investments. In general, you can find lender-specific restrictions on their website. If in doubt, contact the lender before applying.
2. Your investment can increase your income
Using a personal loan may make sense if you are sure you can borrow money to earn money. If the loan can help you start a business that provides immediate income, it could be a good decision.
For example, a personal loan can help you cover the cost of investing in vocational training or certification to add value in the labor market. Or buy devices or software that you need as an entrepreneurfor your business.
Such was the case for Landon Eskew, who used personal loans and other forms of credit to launch his North Dakota-based water procurement business, Highline Water LLC.
"It was about buying equipment and a little bit of protection so we could go through for a short time until the money started flowing," Eskew said. "It allowed me to keep the business going and pay easily."
Above:If you're interested in using a personal loan for career development or to boost your business, be sure to read up on potential payments. Also, consider whether the expected increase in your personal or business income is enough to cover the loan payment and provide you with a solid return.
3. You are convinced of an investment and can afford the risk
Borrowing money to invest is risky, but that risk can be mitigated, according to Riley Adams, a CPA and senior financial analyst at Google. "Risk is something that can be appreciated and managed to your advantage," she said. Spotting potential trends in a particular stock can help you take advantage of and increase returns, and take advantage of leverage such as margin borrowing or credit.personal loanscan improve this return.
In fact, Adams recently did just that. With a margin loan, which allows you to borrow against the value of his stock, he bought more shares that he already owned. To accurately assess the risks, he first conducted his research by reviewing the earnings reports and performance metrics of both the company he wanted to invest in and its competitors.
"After reading numerous earnings call logs, press releases and news articles, I developed a strong sentiment that the stock would go higher in the near future," he said.
Even then, Adams weighed the potential downsides. "He knew the risks and the potential rewards he would get if he made an accurate prediction," Adams said. "The trade could have worked against me and cost me some much-needed funds."
In the end, Adam's guess turned out to be correct and his earnings allowed him to repay the margin loan. His experience is proof that taking out an investment loan can pay off, and provides a good blueprint for other investors to follow.
Above:Do your research before borrowing and investing. Understand the risks and weigh all factors and costs before taking the plunge.
If you are using a personal loan to invest, it may not make sense
While obtaining a personal investment loan can be beneficial in some cases, this strategy carries a significant amount of risk.
"Investing requires accepting risk and understanding how to use it to your advantage," said Adams, who also founded the investment blog Young and the Invested.
“Because none of us have perfect predictive power, risk is unavoidable. Therefore, good management is crucial for the success of the investment.”
Borrowing money to invest is particularly risky since you are dealing with interest rates andyour own credit. Here are three reasons why using a personal loan to invest may not be a wise decision:
1. Your investment could drop, and you'll still be in debt
If you use borrowed funds (including home ownership) or a personal loan for investment, this multiplies the risk associated with the investment.
When you invest with cash, it will be disappointing when your assets lose value. But if you invest with a loan and the asset loses value, you could owe more than the asset is worth.
You could end up "underwater" with your personal investment loan and owe more than you could recover by selling the investment.With less money than when you started, you could have a hard time paying off the loan and disrupt your monthly budget.
2. You could pay more interest than you earn in returns
When you use personal loans to invest, in addition to the added risks, you must deal with interest costs and the burden of monthly payments.
"For this reason, the expected rate of return on your investment must increase proportionately to account for this increased cost of capital," Adams said.
The growth of your investment must exceed the APR of your personal loan or you will lose money.For example, to justify the 10% APR on a personal loan, you would need to get at least a 10% return on your investment. It is a difficult task and there is no guarantee that your investment will reach that goal. (To get an idea of potential APRs, take a look atour monthly report on personal loan offers.)
Not all borrowers are offeredlow interest rates, so you may need to earn even higher returns when you use a personal loan for a worthwhile investment.
3. Your payments could become prohibitive
Debt poses a risk to your personal finances, no matter how you use it. Because when you borrow money, you agree to pay it back with interest at a later date.
Depending on the amount you borrow and the terms of the personal loan you choose, expect to pay a fixed monthly payment until the debt is paid off. The payment is an additional expense for youmonthly budgetthat you should plan until the loan is paid off in full. However, just as you are not guaranteed a return on your investment, you cannot always guarantee that you will be able to repay a personal loan.
Unforeseen circumstances, from everyday difficulties like losing a job to national crises like a recession, can make it difficult to pay your monthly payments. This could set you up for even worse results, such as:in default on the loanand damage your solvency. Unnecessary borrowing should be avoided so as not to overload the budget too much.
If you're wondering, “Should I borrow money to invest?” make sure you understand all the risks and are confident about investing. Shop and compare offers from various personal lenders. By comparing your options, you can ensure that you're getting the lowest interest rate possible, which maximizes the chances that your investment will earn a positive return relative to your debt.