Most types of loans offered by banks and financial institutions are designated for a specific end-use, such as a home loan, education loan, or car loan. A personal loan is more ubiquitous because you need not provide a reason to apply, leaving you free to use it for a variety of purposes, from home renovation to setting up your own business.
Benefits of a Personal Loan
In addition to assisting in financial emergencies or situations of crisis where you need external funds, there are numerous advantages to applying for an unsecured or secured personal loan.
1. Speedy Approval Process
Whereas the processing of any other type of loan may take anywhere from 3-4 weeks or even longer, personal loans follow a far quicker approval process of 24 hours. This duration might be even shorter if you have an excellent credit score of 740 and above.
2. No Collateral Required
When you take a home loan, you must put up the house as collateral or security for the bank against the risk. The same rings true for an auto loan as well. However, you are not obligated to provide collateral for personal loans as they are designed to be helpful during emergencies and work by a lender charging you higher rates of interest for security.
3. Helps with Credit Building
Whether this is your first ever encounter with loans or you have borrowed from financial institutions before, repaying installments of your loan on a timely basis builds your credit score and improves the overall rating. This allows you to apply for more loans with higher chances of being approved. However, the flip side to this also means late payments can harm your score and make it harder to access loans.
4. Versatile and Flexible
Since there are various purposes of a personal loan, you can use it at your discretion without any hesitation. From purchasing a new computer to planning a vacation, there’s no limit to the ways in which a personal loan is beneficial to your needs. This flexibility and versatility are the biggest reasons for these types of loans being a popular option.
Personal Loans for Financial Investments
With such features and benefits, many people wonder if it’s a good idea to use personal loans for making financial investments. Typically, most financial experts believe using a personal loan for investing in shares or the stock market involves a higher element of risk. Despite the potential and possibility for good returns, the market's volatility makes it highly risky.
However, there are ways in which you might want to consider taking a personal loan for the sole purpose of investing. Let’s look at the various scenarios where personal loans can be used to make financial investments.
When to Use Personal Loans for Financial Investments
1. Investing in Shares
Typically, investing in shares is a good idea because it has the potential to generate hefty returns that outweigh the financial benefits of government securities or debt instruments. However, using a personal loan for the same carries a certain amount of risk due to the market's volatility.
At the same time, experts argue that investing with a personal loan gives you more capital to put into a promising market, thus increasing the possibility of making good returns. Unlike intraday trading, investing in shares is a better idea because it emphasizes long-term returns and gives you access to a steady source of income in the meanwhile.
2. Investing in Mutual Funds
Since mutual funds are commonly used as a long-term investment strategy, the risk of putting up your loan amount to expand your portfolio is mitigated to a significant extent. The biggest advantage of investing in mutual funds with a loan is the high liquidity, which allows you to access your savings and returns any time you need.
However, mutual funds are flexible enough to never need a personal loan since you can customize the investment amount in monthly, quarterly, or annual SIPs. This means you can set aside an amount you are comfortable saving each month instead of having to put up a minimum amount, which is when a personal loan might make sense.
3. Investing in the Stock Market
Since investing in the stock market is typically an equity play, using your loan amount to bear the market's volatility can be pretty risky. You need to be a seasoned investor who understands the nuanced movements of the market to perform well over a consistent period.
However, if you are new to the world of investments or hoping to pursue it as a passive source of income, you would be well-advised to opt for long-term investment options instead of short-term gains.
With this, we can conclude that using a personal loan to make financial investments is only wise if your returns are expected to be higher than the cost of the EMIs. Even then, there’s always the possibility of a market downturn resulting in a loss.
Pros and Cons of Making Financial Investments with Personal Loans
Investing in equity is considered relatively high-risk in general, so borrowing the capital may not be the best course of action. However, turning a profit through investments is inherently risky, but many investors opt for personal loans to take advantage of the stock market. Here’s why:
1. Larger Corpus
A personal loan allows you a more extensive corpus to invest in, increasing your odds of making a profit. A personal loan automatically translates into more funds and a better possibility of earning good returns by providing you with a broad value spectrum.
2. Tax Benefits
Section 80C of the Income Tax Act allows many tax concessions for different investments. In addition to that, you'll also be eligible to claim a deduction available on the loan’s interest payments.
Of course, there are several risks involved in taking a personal loan for the purpose of making investments. The consequences of wrong decisions can be far more significant because the money is borrowed, making it more challenging for you to repay the loan. Therefore, it is recommended to only use your personal loan for investment reasons if you have sound knowledge of the market and are confident about your decisions.
To Sum It Up
Now that you know the major pros and cons of personal loans, you will be capable of making a well-informed decision about whether you should invest the amount in the stock market. The best way to go about this is to understand the market well and conduct thorough research into interest rates and the stocks you are investing in.
With Poonawalla Fincorp, you can avail of an instant personal loan of up to Rs. 30 lakh at a competitive interest rate. Not only will you receive instant approval without the need for collateral, but we will also help in the loan planning process right from application to disbursal. Since the loan has minimal requirements and is easy to avail of, you can be flexible about repayments without worrying about any hidden charges.
How magical was the day when you discovered your career path? After a lot of research, putting in so much hard work, late nights, your heart and soul, you have become what you are today.