Personal Loan: Should you use it for investment? Pros and cons revealed | Mint

Taking a personal loan with the intention of investing can be both risky as well as profitable. Although personal loans are flexible and can be utilised for any purpose, using them for investments can be quite a gamble if you do not plan your moves thoroughly with the advice of financial experts. 

Let us understand the implications of borrowing a personal loan for investment and whether or not it is a wise decision for you:

Understanding personal loans

A personal loan is an unsecured type of loan which you can easily borrow for any purpose such as, emergencies, vacation, or ongoing debt repayments. Personal loans usually come with a higher interest rate since the risk for the lender is higher as compared to secured loans. The interest rates offered on personal loans can fluctuate between 9 % and 44 % per annum which usually depend on your credit score, past credit history and your relationship with the lender.

Advantages 

Opportunity to leverage investments:If you want to invest a huge amount in mutual funds or stocks and are confident about the returns, then borrowing a personal loan can be a smart move.

Immediate access to funds:Through personal loans, funds can be accessed quickly so that you can invest in time sensitive investments like IPOs and many more.

No collateral required: Another advantage of personal loans is that they are unsecured and do not require collateral. Hence, even if you make a loss, you will not lose any tangible assets.

Pankaj Sharma, CEO, Religare Finvest shared his insights and said, “Using a personal loan for investment purposes can be a great opportunity when approached thoughtfully. Personal loans offer quick access to funds for promising ventures, such as investing in stocks or starting a small business. They have a straightforward application process and can be used for various investment purposes.”

Disadvantages 

High interest costs: Personal loans usually attract high interest rates as compared to other loans in the market. Hence, if the interest charged on your loan is higher than your investment return, then getting a personal loan for investment will actually be a loss.

Market volatility: Stocks and mutual funds are investments which involve risk because of the volatility of the market. Hence, there is no guarantee that you will make a profit and will be able to repay the loan in time from the investment returns.

Debt burden: If you fail to make profit from your investment, you will be bound to repay the loan under any circumstances. This may lead you to a debt trap and cause emotional and financial burden.

“Interest rates may be higher and repayment terms shorter. For larger investments like real estate, commercial loans may offer more favourable terms. By carefully assessing the benefits and risks, you can make informed decisions that may lead to rewarding outcomes, enhancing your investment journey and financial aspirations,” Sharma added.

Points to note before using a personal loan for investments

Evaluate investment risks: Investing in the market can come with risks and might put you in debt. Hence, it is important to understand your capabilities and whether or not you will be able to bear the risks or not.

Compare returns and costs:Understand whether the cost of the return you expect to get from your investment will be more than the interest of the loan or not. If returns are not higher, taking a personal loan might not be the best idea.

Check your financial stability: Before investing, make sure you have a stable income and have extra funds to repay the loan in case you face losses on the investment.

Consider other funding options: Apart from personal loans, explore other options as well which might be a better alternative and fit your budget better.

Understand tax implications: Some of the investments might be beneficial for you in tax saving which can also help you compensate for the interest charges on the personal loan. However, this should not be your primary reason for the loan and investment.

In conclusion, taking a personal loan for investments involves risks. It is important to do research and make proper planning to tackle any unforeseen losses and keep emergency funds which can be used in the worst case scenarios. It is advisable to understand the rules and regulations of the market as well as the guidelines by RBI on investing before making any decision.