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Investing across different asset segments is a great way to build wealth over the years. There are different options available in the finance market. These include stocks and mutual funds. Some people also opt for fixed deposits and real estate. These ensure promising returns when invested with a proper strategy. But what if you do not have enough funds to start investing? This is when people consider taking a personal loan.
But is it wise? This article sheds light on the pros and cons of using personal loan money for investments to help you make favorable financial choices.
Understanding the Workings
Here is a quick example of how personal loan investing works.
Suppose you have taken a loan of ₹5,00,000 for 5 years. The annual interest rate is 11%.
Then:
- Monthly EMI: ₹10,873 (approx.)
- Total repayment amount: ₹6,52,380
- Total interest paid: ₹1,52,380
Consider that you have invested the ₹5,00,00 in an asset that offers you a 7% annual return over 5 years on average. So when your term ends:
- Total amount earned from investment: ₹7,01,276
- Total loan repayment (including interest): ₹6,52,380
- Net gain after 5 years: ₹48,896
You make a small profit. But there is a catch. The returns from most investment sectors, like mutual funds and equity, are not fixed. Changes in the market can result in a much lesser gain. If the return drops to 4%, then you will get around ₹ 6,08,000. Here, you lose money after 5 years. Loan EMIs are fixed, and you have to pay them on time.
You can always use a personal loan EMI calculator available on reliable Personal loan apps like lendingplate to get a better understanding of how much you will pay. This will help you decide whether investing using a personal loan is worth it.
Advantages of Investing with a Personal Loan Money
The key benefits are detailed below.
1. Easy Access to Cash
Personal loans have quick approval and disbursal. Money is frequently deposited in 24 to 48 hours through a personal loan app. Such speed is handy when doing time-based investments such as IPOs or discounted property transactions.
2. No Collateral Needed
One of the advantages is that personal loans are not secured. You do not have to mortgage any property, gold or assets. Your physical assets are secured even when your investment takes a nosedive.
3. Ensures Flexibility of Use
Personal loans, unlike home or auto loans, are not limited in purpose. You can invest it in stocks, real estate, certifications, or your business. This is why a personal loan for self-employed people is helpful in expanding the business.
4. Would be Profitable at Low Interest Rates
Provided that you possess a high credit score, you might be offered a personal loan with low interest rates. These may be as low as 10%. When the rate of your investment return is higher than the loan rate, you are in a position to make a profit.
5. Investment in Self-Development
You may invest in skill-based certifications or training that can result in increased earnings. It may be a clever action when the new skill raises your salary or employment chances.
Disadvantages of Investing with Personal Loan Funds
The following sections overview the cons.
1. Higher Interest Costs
The interest rates of personal loans are usually high. And when your investment fails to outstrip the cost of the loan, you make losses. Most investors fail to consider this and they pay more than they can earn.
2. Market Volatility
The market may come crashing at any time. Mutual funds and stocks are risky. Your investment may not necessarily do well. In case of a decrease in value, you still have to pay the loan.
3. Debt Trap Risk
In case of failed investments, monthly payments have to be made. This causes stress and financial strain. With time, when you take a loan again to pay the older loans, you may find yourself in a debt trap.
4. Credit Score Effect
An EMI delay in payment impacts your credit score. A large component of your credit rating is your payment history. Bad credit increases the difficulty in obtaining future loans.
5. Other Expenses and Taxes
Other lenders, besides interest, charge a processing or origination fee. In addition, investment gains are taxable. This eats into your actual profit and will render the whole exercise unviable.
When It Might Be Sensible
These are the situations where investing in your personal loan fund makes sense:
- Your credit score is higher than 740, and you receive a low interest rate.
- Your investment offers fixed returns or guaranteed returns.
- You would like to invest in you (certification, skill training)
- You have an emergency savings or a fixed income to pay off the loan
Such situations lower your risk. However, at that point, consider returns, the cost of loans, and your capability to repay them.
Final Thoughts
A personal loan is quick and completely flexible. However, it is a risky idea to invest in it. It is possible to lose money and sleep. Before you apply for one with a personal loan app, check the interest of the loans against the return on investment. Assess your creditworthiness and loan repaying capacity. Borrowed money needs skill, timing and discipline to invest. Lack of any of these might result in a financial setback. Choose wisely. Borrow to make your future, not to ruin it.