The stock market’s recent performance is an exciting sign after a tough year. As stocks start recovering from the COVID recession, it’s tempting to invest as much as you can. The thought of taking out a personal investment loan may have even crossed your mind.
Since personal loans give you a lump sum to spend on virtually anything, you can use them to invest. While it’s possible to take out a loan to buy more stocks, it’s almost always an ill-advised idea. The risks that come with personal investment loans typically far outweigh the potential rewards.
Why You Should Avoid Personal Investment Loans
The main issue here is that personal loans require relatively quick payments, and stock market returns are slow. Average 10-year returns have lingered around 9.2% for 140 years. In contrast, most personal loans have short fixed terms, so you won’t likely make your money back on time.
Many personal loans also have relatively high interest rates. You’ll have to make loan payments each month, which could quickly become expensive, especially considering how slow returns are. You’d need to see a considerable return on investment to earn more in returns than you spend on loan payments.
The stock market can be volatile, as this year has highlighted. As such, there is no guarantee you’ll see high or fast enough returns to repay your loan in time. It’s entirely possible that you’ll lose money on both your loan and investment.
While the economy seems to be recovering right now, that could change in a moment. The stock market is too unpredictable for investing a loan to make financial sense.
When Investing a Loan Makes Sense
Nine times out of 10, taking out a personal investment loan is inadvisable. That said, in some circumstances, it may make more sense than others. Be aware, though, that these situations are rare and may be less profitable than you’d think.
Investing a loan only makes sense with stocks that offer guaranteed returns with minimal risk. The stock in question must provide a high return on investment, and those returns need to come quickly too. On top of these requirements, you also need to be in a sound financial position.
Since loan payments could surpass returns early on, you’ll need a sizable cash cushion. You should also have tools to track your spending to ensure you can meet loan payments on time. If you want the best loan terms possible, you’ll also need an exceptional credit score.
Alternatives to Personal Investment Loans
Even if you have the right finances, low-risk, high-reward stocks like this are exceedingly rare. If you want to increase your stock ownership, it’s best to pursue some other options. The most straightforward solution is to set aside an investment fund.
Taking out a personal loan will get you a lump sum fast but comes with too many risks. Instead, put aside some money every time you get paid to invest later. This process will take more time but will eventually give you a large lump sum you can use to buy more stocks.
Alternatively, consider diversification over putting more money into one stock. Diversification reduces the risk of substantial losses from one or two events. Given recent uncertainty, if you want to invest more, try diversifying your investments instead of funneling lots of cash into one stock.
Navigating the Uncertain World of Investing
Investing in the stock market always involves some amount of risk. Since it’s always a gamble, it’s not the right thing to go into debt over. Personal investment loans can multiply the risk of investing and have a minimal chance of succeeding.
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