Using Personal Loans as Investment Vehicles
Money makes the world go round. It’s a familiar phrase, and it is a common trope for people who make rash investment decisions. It is typical to want money; from an early age, people are shown the dramatic windfalls of frivolous investors and millionaires, leading to envy and desire. Unfortunately, the eagerness for wealth can lead to poor decision-making, resulting in financial consequences.
A growing number of people feel that taking financial risks is necessary to get in on the inevitable economic rebound to come after a tough year, but how far is too far? Should you take out a personal loan and invest it in the stock market? The remainder of this blog will define the personal loan and examine the reasoning behind using such a loan for an investment opportunity.
Understanding Personal Loans
Personal loans do not require collateral, meaning they are unsecured. While this is beneficial to the borrower because they do not risk property loss for failure to pay the loan, it is a greater risk to the lender, which means they often require higher interest rates.
Many people become familiar with personal loans through debt consolidation, but there are few restrictions on how the money from the loan is spent. Because of the lax conditions, some borrowers find it tempting to use a personal loan for investing, but is this possible?
Using Personal Loans To Invest Is Possible, Most of the Time
Unless otherwise stipulated in the contract, you can spend money from a personal loan how you see fit — paying down debt, renovating your home, buying a car, etc. However, while you have spending freedom with most personal loans, those acquired for debt consolidation likely have stipulations about fund uses.
If you are not sure if you can use personal loan money for an investment, talk to the loan officer. They can provide you with a more thorough understanding of loan specifics than this article, or any article for that matter because a personal loan is unique to every borrower.
Reasons Someone Might Be Tempted To Use a Loan for Investment
Opportunity is temptation. If someone knows of a financial prospect but does not have the money to invest, they might find a personal loan tempting. However, some people do not need a specific opportunity. Some investors know that when the economy struggles, it naturally rebounds, so they want to get in on the upswing before it is too late. However, you should never invest a personal loan unless you know the windfall is eminent and will result in a more significant profit than the debt you would owe.
Reasons To Never Use a Personal Loan To Invest in the Stock Market
There are at least three reasons to avoid taking out a personal loan to invest in the stock market: fixed terms, high-interest rates, and monthly payments. Personal loans do not often come with long durations, and most are shorter than seven years. While an investment can average out over longer periods, short or quick turnarounds are rare and unpredictable.
Personal loans come with higher interest rates. Some of the best rates offered are around 6% APR, but those are reserved for the perfect borrower, which, again, is rare.
Finally, a personal loan requires monthly payments, which are often high because of interest. If the stock you invest in does not show steady or predictable gains, you could risk losing your stake when you have to sell shares to make your loan payment.
What do you think about investing funds from a personal loan? Leave a comment below.