For an average individual investor, some of the well-known investment go-to routes include stocks, bonds, shares, mutual funds, fixed deposits, etc. From the typical basket of instruments, while it’s the debt instruments and government securities that are the more stable ones with steady but low returns, it’s the equity instruments that bring higher returns with a consequently higher degree of risk.
The stock market may be cut for those with appetites for high risks, but its returns are very lucrative, which drives investors to go all out. And it comes with good reason. Logical and strong stock market investments often draw the blueprint to expansive and long-term wealth accumulation.
This finally brings us to the subject matter at hand. Should you take a personal loan and invest it in the stock market?
The process of getting a personal loan and using it for investment in shares is called leveraging. While there are investors who are suspicious of the idea, leveraging has its own benefits to consider.
A personal loan gives you a higher corpus to invest in the market that increases your chances of making a big profit. It owes to the fact that a personal loan can translate to more funds in hand, which in return opens up a bigger value investment spectrum for you. Further, acquiring any loan comes with associated costs that often involve monthly loan servicing expenses and high-interest rates.
The income that accrues from your investments will act as a cushion for ancillary expenses. Further, your taxable income will minimize if your income from the investment is not higher than your expenses.
Now, if you’re seriously considering a personal loan to play the market, here are the five riders you need to consider thoroughly.
You have to find out what kind of interest rate your lender, such as Credit Ninja Financing offers before snapping up stocks. You might earn high returns on your investments, but it won’t be good if you have to return a big portion of it back to the bank.
You wouldn’t earn big if the APR (Annual Percentage Rate) of your loan exceeds half of the average return rate of your investment. Thus, make a wise comparison between different lenders.
When taking out a loan for investment, the main goal is to earn big returns regularly so that you can pay the borrowed money. But, it will take a little longer for you to earn if you’re going to take a long-term buy-and-hold approach. If such is the case, make sure the loan payments are feasible for you.
It’s important, especially if you’re paying down other debts such as a mortgage or a student loan. You might find yourself in financial trouble in case you fall flat on your personal loan payments. The lender will seize your collateral or sue you. It will garnish your wages if they win.
If worse comes to worst, you might be forced to file for bankruptcy. With that said, you need to make sure that your loan payments aren’t going to decapitate you financially.
Jumping right away into the stock market without doing your homework first a bad move, especially if you’re going to use a borrowed money.
If you’re eyeing a certain mutual fund or stock, you have to study and analyze its performance since inception, not just the recent months.
A stock might be doing well right now or in the past, but it doesn’t guarantee to do just the same in the preceding months. You could lose money if you’re not careful.
If you’re one who like to pay attention to the news, then you know that the market can change in a heartbeat. If you want to use a personal loan for investment, how will you deal with or manage the risky behaviors of the market?
To have the possibility of bigger rewards, some people take more risks. But, if you’re not that much of a risk-taker, borrowing to invest could be out of your comfort zone.
Apart from charging interests, lenders might require additional fees when you get a personal loan. It might only be a few dollars per month, but every cent counts when it comes to investment returns.
You’ll also have to check the investment’s associated costs besides the lender’s fees. For instance, you will need to pay a trade commission whenever you complete a transaction if you’re buying stocks through an online broker. Mutual funds also come with management fees that you’ll need to be aware of.
Using a personal loan to invest in the stock market is definitely not for the faint of heart as it can be a big gamble. It’s best to analyze first the pros and cons from every angle before you pull the trigger. This is also to make sure you know what you can potentially lose and gain. Notwithstanding, it could be a sound financial decision after all, provided you follow the advice above.
Author Bio: Tiffany Wagner is an experienced web content writer whose interests extends to financial analysis, banking, and finance. When not working, she spends her time reading her favorite classic novels.