Should You Use a Personal Loan to Invest in the Stock Market?
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Should You Use a Personal Loan to Invest in the Stock Market?

  • Highlights

  • Using a personal loan to invest in shares is called leveraging

  • Investing a loan can give better returns on investment

  • Income from investment can be used to pay interest rate on loan

  • Be sure about the lender’s interest rate before going ahead

For the average individual investor, some of the more popular investment avenues include shares, bonds, stocks, mutual funds, fixed deposits, etc. From the typical basket of instruments, while it is the government securities and debt instruments that are the more stable ones (offering steady but comparatively low returns), the equity instruments carry a higher degree of risk and consequently, relatively higher returns as well.

As much as the stock market is for the investor with a higher risk appetite, the returns are so attractive that they often convince them to go all out. And this is with good reason; that’s because strong and logical investments in the stock market often design the blueprint to long-term and expansive wealth accumulation.

This finally brings us to the question in hand - should you ever use a personal loan to invest in the stock market?

The process of taking out a personal loan and investing it in shares is called gearing or leveraging. While there could be a section of suspicious investors not wholeheartedly given to the idea, leveraging can have its own benefits. Firstly, with a personal loan, you have a greater corpus to invest in the market which indeed encourages the chances of making a hefty profit. This is because a personal loan translates to more funds in hand, that in turn opens up a greater investment value spectrum for you. Secondly, availing any loan comes with associated costs that include (often high) interest rates and monthly loan servicing expenses. How an investment helps you is that the income that accrues acts as a cushion for such ancillary expenditure. Moreover, your taxable income reduces should the expenses outweigh your income from the investment.

But there are two riders that you need to factor in if you are thinking about using a personal loan to invest:

1. Consider the interest rate on the loan and account for all the repayments

Before giving yourself the go-ahead, you should be certain of the lender’s interest rates on the loan and take stock of all your monthly repayments. A higher interest rate means you will have to make an increased profit on your investments to service the interest payable – you don’t even reap the profits in that case. Therefore, the decision to avail a personal loan to invest in the stock market should hinge on your knowledge of the lender’s interest rates and other mandatory expenses. Go for a lender, the policies of which meet your financial objectives, and you should be good to move forward with your decision.

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2. Know all about investing

One of the primary reasons why some investors fail to capitalize on the market is they don’t have the knowledge repository considered principal for investments. Study about a stock and know why it has been performing the way it has before investing in it. This will also give you an idea of the stock’s performance since the beginning, helping you to predict future trends and patterns as well.

Using a personal loan to invest has got its own upsides and you could also better your credit score if you are wise with the process. But it is good to be careful and be in the know of its guidelines. Err on the side of caution and this might turn out to be a sound financial decision after all.

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