A personal loan may now be easily obtained via banks, non-banking financial institutions (NBFIs), and peer-to-peer (P2P) lending platforms. Some investors take out personal loans to buy stocks and subscribe to initial public offerings (IPOs), hoping to make healthy returns and pay off the debt. Many investors are eager to join in this rise even with borrowed money because the equities market is doing well and the Sensex is at an all-time high.
Why it’s not a good idea to borrow money and invest in the stock market?
For short-term profits, financial experts advise against borrowing and in favor of investing in stocks. Stock investing, especially for a short time frame, is extremely dangerous. Due to the erratic nature of the equity markets, investments need time to gain traction and increase in value. Borrowing money at 14% interest and hoping to get back the money in a short amount of time doesn’t make sense.
What motivates investors to think about taking out a Personal Loan For Investments?
Leveraging is the process of investing borrowed money in assets like mutual funds, equities, and other types of investments. When it comes to “leveraging,” there are two camps of opinion. Leveraging, according to some investors, is a good way to generate more income quickly, while others think it’s a very hazardous strategy.
For the following reasons, investors may think about obtaining a personal loan:
- Having No End-Use Restrictions
The reason for which a loan’s proceeds may be used is often specified. By way of illustration, if you take out a vehicle loan, you can only use the money for a car purchase and not for travel. The use of a personal loan, however, is not constrained in this way. As long as it is legal, a borrower is allowed to use the personal loan amount for nearly anything. You can thus utilize this money for your child’s schooling or wedding, house renovations, the purchase of a costly item, or investing it further to generate profits, among other things.
- No need for a Collateral
There is no fear of losing the asset or collateral if you are unable to repay the loan because personal loans do not demand any security to back up the loan.For instance, if you take out a loan against your property or securities, such as stocks, mutual funds, a life insurance policy, etc., the lender has the right and power to sell your property or security in order to recoup the loan balance.
- Fast and Simple Loan Process
Especially if they are investing in the stock market, investors typically need money very now. In this situation, a personal loan might quickly and easily give them access to money. Other loan kinds call for the appraisal of a financial instrument or a property value, which might take time and cause a delay in the loan application process.
- Maximum Capital
The profits you get will increase as your investment amount does. In order to obtain the highest profits in the shortest amount of time, many investors choose to borrow money. Depending on your profile and ability to repay, a personal loan up to a maximum of Rs 50 lakhs may be provided.
When is getting a personal loan for investments a smart idea?
Many NBFCs actively push personal loans, claiming that doing so is the greatest method to raise more money that can be utilized to make the most money possible. Banks and certain NBFCs advise against using borrowed funds for riskier, short-term investments, nevertheless. Only if your investment opportunity satisfies all of these criteria would using a personal loan for leverage make sense:
When you have a lot of faith in your choice of Investments
when you use the money you borrowed for a personal loan to invest in a chance that has returns that outweigh the cost of the loan. When there is little to no danger of capital loss or when returns are assured.
Risks of taking out a Personal Loan to invest in the Stock Market
- Risk associated with Capital Investment
The ability to profit from initial public offerings (IPOs), stocks, and derivatives is not guaranteed. Returns might be negative and reduce the value of your investment. Furthermore, the cost of this personal loan’s interest payments may be damaging.
- Interest Rates
Your loan’s interest rate can go up. It’s likely that your assets won’t be enough to pay the increased cost if interest rates climb by 2% to 3%. Your spending plan might need to change in order to pay the EMIs.
- Interest rates of Personal Loan equals expected return
Interest rate on a personal loan is around 14 percent and above for most banks. It is just about equal to the long term return expectations from largecap equities. Even in the longer term
- Liquidity And Concentration Risk
Have you invested money in some smallcap/penny stocks which turned illiquid and not traded on the exchange? Concentration risk is investing only in 1 stock, which may underperform after you have invested. It may continue to underperform if the near term outlook from analysts is poor.