Nowadays, people are becoming familiar with different investment instruments. Popular investment avenues include bonds, mutual funds, stocks, fixed deposits, FOREX, and cryptocurrency.
These investments have different categories/characteristics. Government securities such as shares and bonds are more stable but have comparatively lower returns. On the other hand, stocks, FOREX, and crypto are more volatile and need higher appetite risk. Although they are pretty unstable, they can offer higher returns depending on their performance and other factors.
While they differ in some terms, investments are a great way to grow wealth and meet your financial goals. But what if you want to open an investment account, but you’re running out of cash? You keep thinking of possible ways to pursue it, and now you consider applying for a personal loan. Personal loan lets you borrow cash for any reason, but is it worthy to use in investment?
When Using a Personal Loan to Invest Might be a Good Idea
Do not get conceived on the idea of using a personal loan to start your investing journey. If you think you can tick these three factors below, then you’re ready to go.
1. You Can Qualify for the Lowest Interest Rates
Interest rates vary on your credit score. If you have an excellent credit score, you will most likely get the lowest interest rate your lender can offer.
This is critical if you plan to apply for a personal loan for your investment. It will ease your payment plan and won’t cripple your investment earnings.
2. You Can Pay the Loan Off Early
Another factor you should think about is the duration you can pay the loan.
If you have a regular source of income, what you can do is compute your monthly expenses and see how much your extra money is. For example, you are earning 20,000 pesos monthly, and your monthly expenses is 12,000 pesos, then you have an extra 8,000 pesos, which can be your base amount for a possible loan.
Check your possible loan amount and repayment plan. See if there’s a chance to pay it in the shortest period of time. This will prevent you from paying higher interest and flip your investment return.
You can also find additional sources of income to pay off your loan early. Check side hustles at home or online. Just make sure that you aren’t violating any prepayment penalties.
3. You’re Confident in the Investment Return Potential
If you understand how investing works, then that’s a good sign. You can quickly grasp the possible return of your investments. You can compare it to your loan interest and see if it makes sense to push your plan.
A simple thing that you can do is compare your potential return and loan interest. Create an excel sheet — input your investment vehicle, average return, loan, and interest. If your potential return from the investment is higher than your loan, it would be easier to decide.
Note that your investment growth should exceed your loan APR (Annual Percentage Rate).
In addition, if you’re a risky type of investor and plan to trade in stocks or FOREX, where you can easily pull in and out your money, you can add it to your budget so it won’t be hard to repay your loan.
When It’s a “No” or You Should Think Twice Before Applying for a Personal Loan to Invest
1. Your Investment Could Tank
Although you understand investing and project your potential returns, there are chances that there’ll be unexpected scenarios that may affect your investments. This includes technological changes, inflation or deflation, natural disasters, wars or other conflicts, corporate or government performance data, regulation, and many more. Note that it will take time before everything else comes back to normal when this happens, so does your investment.
Your investment could tank up, but you still owe a personal loan debt.
2. The Payment Becomes Unaffordable
Debt poses a risk on your personal finance, whether you use it in a medical emergency, tuition fee needs, or on your travel. That’s because you are adding responsibility and commitment to repay the amount monthly.
It becomes an additional expense to your monthly budget. And that’s true even if you encounter unforeseen circumstances such as losing a job or other emergencies.
Should You Borrow Money to Invest?
You might be excited to start investing, but before doing that, make sure you understand what it is and its risk. If it’s your first time taking a loan, look around and compare at least three lenders. Check their interest rates, repayment plan, upfront fees, and other fees that may affect your total proceeds.
By comparing options, you’re sure that you get the best offer and maximize your investment’s chance for a positive return relative to your personal loan.