Should You Use a Personal Loan to Invest in the Stock Market?

By | April 12, 2020

Planning to invest but don’t have enough funds? If you’re considering taking out a loan for it, read this. 

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Planning to make your investment debut but don’t have the funds for it? If you’re considering taking a loan to fund your investment, think again. High-interest loans like Credit Cards and Personal Loans are really useful in case of emergencies or to meet an urgent need but shouldn’t be used to invest in the stock market. Experts advise taking a loan only if you’re looking to build an asset like a Home Loan or meeting an emergency need like sudden hospitalisation. Read on.

High Interest Rate

Personal Loan interest rates average between 16-18%. Let us suppose you do take out a loan to invest in stocks, this means that you will need returns of more than 16% in order to make a profit. Getting these kind of returns year after year is nearly impossible given how stocks are influenced by vagaries of the market. They do not give steady returns year after year. Some years may offer negligible returns while some may give windfall gains. Over a period of time (7-10 years), you can expect lower double-digit returns of 10-12% from equity Mutual Funds.

Additional Reading: Can You Get A Personal Loan With A Low Credit Score?

Gearing Or Leveraging

The process of taking out a Personal Loan and investing in shares is known as gearing or leveraging. Many opt for a Personal Loan to invest so that they have a greater corpus of funds at their disposal to invest in stocks. This not only improves their chances of earning a hefty profit but also opens up a greater investment value spectrum for them. Another advantage of having an investment is that Personal Loans often come with very high interest and involve monthly expenses that go towards servicing the loan. Income that accrues from such investments act as a cushion against such ancillary expenses.

Additional Reading: Using A Short-Term Loan To Close Other Loans

If you are decided on taking out a loan to fund your investment in stocks, remember to keep the following pointers in mind:

  1. Consider The Interest Rate:

Before taking the plunge, weigh in on the interest rate that the lender is offering for the loan. A high interest rate means shelling out more in terms of EMIs and this could eat into your monthly budget. Take a stock of all your monthly fixed expenses and then factor in the EMIs. Remember that a higher interest rate means that you will also need to make a higher profit on your investment to be able to service the interest payable. Thus opt for a loan only if you’re sure of the lender’s interest rate and are comfortable with the demands it will place on your monthly expenses.

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2. Know All About Investing:

One of the reasons why investment in stocks tank for many is that most people are not well-versed with how the market works. Before investing in a stock, read up and research on how the market works, how the stock is performing and why it is performing so. This will help you predict future patterns and trends.

Using a Personal Loan to invest can mean that you have more funds to invest with but there are a whole lot of considerations you should bear in mind before diving in. It’s always better to err on the side of caution and plan your moves accordingly.

Additional Reading: What Is An IPO? How Can You Invest In One?

Looking to meet an emergency need with a Personal Loan? Click to explore!

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