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You might have decided it’s time to dabble in the stock market to invest money. But what can you do if markets are down and it’s a great time to invest…but you don’t have the capital to do so?In that case, taking out a personal loan to invest in stock markets might be something you’re considering. But is it a wise course of action? Will you get your return on investment and be able to pay the loan back? These are crucial questions to ask.
What Is a Personal Loan?
Let’s first cover what is a personal loan and what it can be used for.A personal loan is money you borrow for personal use (as opposed to a business loan). You can use a personal loan for a variety of things, from funding dental care to paying off credit card debt. The bottom line is you can use the money you receive through a personal loan for many different types of things, including making investments.Learn more with 10 Personal Loan Tips.
What Markets Can You Invest in With a Personal Loan?
If you’re thinking about taking out a personal loan for investing, you might wonder about the specifics. Again, there are no limits on what is allowable. It comes down to what makes sense for you.There are a variety of investments you can make. You can buy individual stocks, bonds that require an investment of a year or more, or even cryptocurrency, if you’re so inclined. You can invest in real estate, with the goal of making a return on your investment.But most people advise caution. Remember, it only makes sense to invest if you are confident about making a profit that is higher than what you’ll pay in interest on the loan.
Personal Loan to Invest in Stock Market
The stock market rises and falls in value. If you are fortunate enough to purchase stock when prices are low and hang onto it until the value increases, you can realize a nice profit.If you don’t have the cash in your bank account to buy stocks at the time you want to, you can take out a loan to invest in the stock market. Just remember that the stock market is full of risk.
Personal Loan to Invest in Crypto
Cryptocurrency is a rising trend in the world of investing. Just like you can invest in the stock market, you can also invest in crypto and realize a profit if the value of the currency rises.Crypto is in a volatile state, however. Caution voiced about the stock market applies to crypto as well.
Personal Loan to Invest in Real Estate
Investing in real estate is a bit different than investing in stocks or crypto. Real estate markets generally rise in value over time (whereas the stock market and cryptocurrency may rise and fall on a daily basis). You might buy a home, renovate it, and sell it for a profit. You can also take advantage of foreclosures that are for sale for a fraction of their value, and you can use a personal loan for investment in real estate.
What to Consider With Personal Loans for Investing?
If you’re considering taking out a personal loan to invest in stock markets, crypto, or real estate, there are a few things to consider before doing so.
Interest Rates
Any loan you take out will come with interest, and the interest you pay will depend on several factors. Who you borrow from will determine the rate as well as your credit scores. Here’s how it is decided whether you pay a little or a lot in interest.If you have poor credit, you may be able to borrow money from a private lender, though realize you are likely to pay more in interest than if you qualified for a bank loan.
Fees
In addition to interest rates, some lenders charge other fees. There may be an origination fee when you sign for the loan. Some lenders charge late fees if you miss a due date for a payment. Some even charge a fee if you pay off the loan early. It’s smart to research any fees before signing a loan agreement.
Credit Score
As mentioned, your credit scores will impact the loans you’re eligible for and the rate you pay. The higher your credit scores, the lower the interest rate you may qualify for, and the lower your scores, the more you’ll pay.Consider whether you are guaranteed to make a larger return on your investment than you’ll pay in interest before borrowing. As there are few guarantees in investment, think carefully.
Prepayment Penalty
You may think you’ll borrow money to invest in the stock market and then quickly repay the loan, but as you may be charged a prepayment penalty if you do this.
Loan Amount
It’s important to consider how much you need to borrow before shopping for loans, as well as how you will use the money. You might qualify to borrow more than you need, but borrowing too much might be more than you can afford each month.
Monthly Payments
Speaking of what you can afford, consider how much you can budget for a monthly payment. You can’t assume you’ll instantly get a return on your investment, so you should be able to afford your monthly loan payment without relying on the investment turning a profit. Of course, this raises the question: If you could easily afford monthly loan payments, why do you need a personal loan to make your investments?
Reasons to Get a Personal Loan for Investing
Let’s look at a few reasons you might consider a personal loan to invest in stock markets or other things. It’s important for you to identify the reasons you want to borrow the money and be realistic about the profits you may (or may not) realize.
Leverage Credit
It’s counterintuitive: the best time to borrow money is when you don’t necessarily need it. When your credit scores are high, you qualify for the best rates, and this is the best time to borrow (in terms of it offering the lowest priced financing).If this describes your situation, now might be a time to leverage your positive credit situation to borrow money you can then turn a profit on.
Increase Income
Savvy investors aim to turn investments into income. If you’re confident in understanding the stock or crypto market or are experienced at real estate investments, you may be aiming to boost income by taking out money to invest.Returns on Your Investment are LikelyWhile no investments are ever guaranteed, if you’re an expert on the market and see patterns that indicate a return is likely, it might be a time to invest. Remember: If you’re wrong, you still have to pay back the loan.
If you already owe debt for a loan or credit cards, taking out more debt makes little sense. First, you’ll negatively impact your credit scores by taking on more debt, and you’ll dig a deeper hole of debt that you’ll have to work to pay back.
Interest Payments
Depending on the interest rate you are offered, you might be paying more in interest than you’re making on your investment, and in that scenario, it’s not a wise course of action.
Expensive Payments
Depending on what you qualify for, you may end up paying a lot more in interest and fees than you can afford. Especially with private lenders and international personal loans, there can be exorbitant fees that make a monthly payment skyrocket.
The Takeaway
People interested in investing in stock markets, cryptocurrency, or real estate might be tempted to take out a personal loan to provide the capital needed. It would only make sense to pursue a personal loan if the person could be absolutely sure to make enough money in the investment to comfortably cover loan payments. But as investments, particularly in the stock market, are inherently risky, there can be no guarantees.Lantern can show you personal loan rates.
Frequently Asked Questions
Is it illegal to borrow a personal loan to invest?
Photo credit: iStock/svetikd
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About the Author
Susan Guillory
Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
