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Investing is a great way to grow your net worth and achieve financial goals. You can often make a lot of your money by putting it in the stock market rather than keeping it in a savings account. In the long run, the stock market offers an annual rate of return of about 10%, compared to 1% or less in a high-yield savings account.
If you are looking to increase the amount you invest, you can consider getting a personal loan to add to your investment account. But this is rarely a good idea.
This is why you should generally not take out a personal loan for an investment, as well as some cases where it might make sense.
Why not get a personal loan for investment
a personal loan It is a relatively small unsecured installment loan that you pay back at a fixed rate over a period of three to seven years (sometimes longer). You don’t usually need to provide collateral, but you do have to make a monthly payment until you pay off the loan in full – plus interest. If you don’t, you risk damaging your credit score. Personal loan amounts often range from $10,000 and $100,000, although some lenders also offer smaller loan amounts.
With an investment, there is very little substance. The value of the money you put in the market may go up, or it can go down. You can even lose everything.
This difference makes using a personal loan for investment inherently risky, and usually a bad idea. In fact, some personal loan lenders specifically prevent you from using the money to invest. Here are some other reasons why you might be shy about using a personal loan for investment:
- The investment you are considering may lose its value. When you invest, you may lose money. Markets can crash, stocks can go down, and businesses can go down. But when you take out a loan, you have to pay back the money and the interest, no matter what happens. Losing money on your investment can make it more difficult to pay off the loan, leaving you vulnerable to the severe financial consequences of not paying the loan.
- You have poor credit. When lenders determine the interest rate you’ll pay on a personal loan, they take your credit score into account. People with excellent credit pay lower rates, while people with fair or poor credit will pay higher rates. If you fall into the latter category, your personal loan can be expensive. People with bad credit They may have a hard time finding any personal loans available to them at all. This can make it difficult to achieve a sufficient return on the investment to cover the interest you must pay on the loan, even in ideal conditions.
- Your money may change. With a personal loan, you will know from the start how much you will need to pay each month. It will not change for the duration of the loan. While this down payment may be affordable when you take out the loan, your money may change. You may lose your job, face unexpected expenses or a financial emergency. A significant decrease in your income or a rise in your expenses may make it more difficult to pay off your monthly personal loan payments. If this is a possibility in your case, it may not make sense to get a personal loan for investment.
When Getting a Personal Loan for Investment Makes sense
Using a personal loan for investment is always a bad idea. However, in rare cases, it can make sense. Here are some scenarios in which you might consider investing personal loan money:
- You can get a higher rate of return on your investment than you pay in interest. Using a personal loan for investment in theory makes sense when you are able to safely earn a higher rate on your investment than you pay in interest, earning you money over the life of the loan. However, there are few investments that are safe, especially in the relatively short term of your loan. If you find a safe investment – such as a certificate of deposit or a savings bond – with a higher rate of interest than stated, it may make sense to try.
- You will be able to pay off the loan early. If you owe a large amount of money, such as an inheritance or home sale, you may be able to use a personal loan to start investing and then pay off the loan quickly. Be careful, though: Some personal loans require you to pay a prepayment penalty if you pay off your loan early.
- You can use investing to generate income. Investments don’t always mean stocks. You may consider using a personal loan to start a new business, which will provide you with a way to earn money for years to come. This approach is not without risks, but they may be risks you are willing to take.
Other (Safer) Options for Building Your Investments
Although borrowing money to invest is risky, investing is still a good idea – it’s an excellent way to build long-term wealth and save for retirement.
Instead of taking out a personal loan and using the money to invest, consider the following investment options:
- Pay off high-interest debt and invest savings. Personal loans can be a good way to reduce interest costs, especially if you have high interest debt such as credit cards. You can take out a personal loan to pay off those other debts, directing interest savings toward investments.
- Increase your 401(k) or IRA contributions. Work-sponsored retirement plans are a great way to start investing. If you have a 401(k), consider increasing your monthly contribution. If you don’t have access to a work-sponsored retirement plan, you can open your own IRA to start saving for retirement.
- Learn more about mutual funds. A mutual fund can be another good entry-level investment. The money you put into a mutual fund will be pooled with money from other investors and used to buy stocks, bonds, and other types of securities. Investors in the pool will participate in any dividends or interest paid by the investments.
If you decide to apply for a personal loan, Credible makes it easy Compare personal loan rates From different lenders, all in one place.