personal loan for investing

Pros And Cons of Investing in Stocks with a Personal Loan

Investing money is one of the tenets of a prudent, well-charted financial plan. Consistently earmarking a portion of your funds towards good investments is the basis of building financial stability and security.  

The stock market is one of the most popular investment avenues, with the potential to generate substantial returns. A stock market is a place where shares of publicly held companies are traded. Given its potential to provide multifold returns and wealth-creating opportunities, it is among the most well-liked investments, even with the inherent risk it carries. Markets are prone to volatility and sudden, spiraling sell-offs.  Therefore, only investors who have a high-risk appetite and thorough knowledge about market dynamics should directly invest in listed entities.  
 
If you’re eager to participate in the markets, can ascertain intrinsic values, and dissect market trends, but are unable to put together enough funds to make bets, there may be a solution for you. If you’re sure of your stock-picking skills, you can finance your big bets by availing of a Personal Loan. Taking out a Personal Loan for stock investing is one strategy that has recently gained popularity among stock market traders.  

Let us understand how Personal Loans and stock investments go together.

Understanding “Leveraging”  

Leveraging is the process of acquiring a Personal Loan to invest in the stock market. Given the scope of earning high returns on stock market investments, the loan's cost can be quickly covered while also generating a handsome profit. Leveraging has significant benefits and drawbacks, and anyone thinking about taking out a Personal Loan for stock investing should do so but only after weighing its pros and cons.  

When is it a good idea to invest in stocks using a Personal Loan? 

You have a healthy credit score

One of the main criteria for determining how much a Personal Loan will cost you depends on your credit score. With a CIBIL score of 750 or higher, for instance, you have a better chance of being approved for a lender's lowest interest rate and may not lose as much money on your investment. You will pay less interest during the term of the loan if you are eligible for the most competitive interest rates, which means borrowing the money will cost you much less and mitigate your risk to some extent.  

You can afford the EMI

Think about whether you would be able to afford the loan's monthly payment regardless of how well your investment performs. Be sure to account for any debt you are currently repaying as well as any other objectives you are saving towards. You should opt for the loan if, after carefully considering your budget and running the numbers, you remain positive about your capacity to repay the loan.  

When is it a bad idea to invest in stocks using a Personal Loan? 

You are adding to your debt

 A high-risk investment has a higher-than-average possibility of performing poorly or providing below-average profits in a short period. For instance, stock market investing is thought to be particularly risky. Your investment approach becomes more unstable as you add debt to your portfolio.  

You don’t have a good credit score

 You won't be able to get the lowest advertised interest rate from a lender if you don't have an excellent credit score. The cost of the loan could exceed the possible return on your investment when Personal Loan rates go high. Additionally, there will probably be fewer lenders willing to grant you a loan.  

You can’t afford failure

 This is a bad option if you rely on the investment to generate the promised profits in order to pay off your Personal Loan. No investment can promise a return of 100%, but one thing is certain: You will need to start paying back your loan right off the bat, plus interest. If you get behind on payments, there are additional late payment fines.  

You’re nearing retirement

 You should try to curb your expenditures as you near the end of your working years. Your retirement savings may be at risk if you take out a Personal Loan for stock investing when your income is decreasing. 
 

Pros of using Personal Loan for stock market investment

 Taking out a Personal Loan to invest in the stock market has a range of benefits, including the following:  

Larger investment corpus  

 The amount of funds accessible to the investor when taking out a Personal Loan to invest in shares is significantly higher. With a Personal Loan, you can instantly obtain a sizable sum of money that you can invest in the best shares and gain significantly high returns as opposed to investing from savings or by setting aside a portion of your income and sacrificing other expenses.  

Cover loan charges with profits

 Undoubtedly, a Personal Loan has its own unique set of charges, such as interest and administration fees. When large and positive returns are generated on investments financed using a Personal Loan, these charges may well be partially covered. Remember that investing in the stock market involves risks, but if you are wise with your investments, you can make significant profits that will outweigh the cost of the Personal Loan you initially took out.  

Tax benefits

When you take out a Personal Loan specifically to buy shares, the amount of interest paid on such a loan will be added to the cost of the acquisition of the asset. Though you won’t get a concession in the year you make interest payments, the deduction will be allowed in the year in which you sell the shares. You can also claim a tax deduction on your Personal Loan’s interest payments.  

Cons of using Personal Loan for stock market investment

 While a Personal Loan for stock investing has many advantages, several elements work against this type of borrowing. Among them are:  

High-interest rates  

 High-interest rates on Personal Loans increase the cost of the loan when the time comes to repay it. Leveraging can put a strain on the borrower's finances if they do not make enough profits in the stock market.  

Losses in investments

Your portfolio is likely to see negative returns if you do not invest in the best shares, or even if markets take a sudden ugly turn. This will not only have an impact on your investment but will also put you in a difficult financial situation where you will have to use your savings to pay back the loan.  

Final thoughts

Not everyone can take out Personal Loans for stock investing. There is always a chance that your investment won't generate the expected return. Other circumstances, such as an unanticipated layoff or a hospital bill, might also wreck your monthly finances and make it difficult to pay back the loan. Make sure to speak with an investment advisor before you make the decision. If you believe borrowing money for investments is the best course of action, then evaluate several Personal Loan lenders to choose the most suitable lender for you. Whether you choose to borrow money from a conventional financial institution, an online lender, or a peer-to-peer lender, you should carefully consider each one's conditions, interest rates, and fees.

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