Using Personal Loan To Invest: Pros, Cons And Key Factors To Know Before Borrowing

Investing regularly across different asset classes could be helpful to build a sizable corpus over the years. With a wide range of options available, such as stocks, fixed deposits, mutual funds and real estate, investing can give favourable returns with a well-planned financial strategy. But what if you don't have enough funds to start investing? Some people consider taking a personal loan to leverage their investments.  

Taking out a personal loan for investment could be rewarding only when you secure a cheaper loan, a reliable lender and a savings instrument offering higher returns. Many investors are these days exploring options like personal loans to maximise their gains from high-return investments like equities with the booming stock markets in India. Using a personal loan for investing could be rewarding only when you borrow at a lower interest rate and invest the money in assets offering higher returns.

However, if done without proper planning and research, it may backfire and lead to a financial crisis. 

Let's see how a personal loan can be used for investment and the important factors you should keep in mind before borrowing.

The best part about investing through a personal loan is that you get instant access to funds. Suppose you are willing to invest in the stock market but don't have enough funds. So, you can apply for a personal loan and it will be immediately approved if you meet the eligibility criteria, such as a good credit score and stable income.

You don't even have to pledge any collateral, such as gold or property, to get the personal loan, as it is an unsecured loan. So, even if you suffer a loss, you will not lose any tangible asset. In addition to this, it is easier to plan your finances as there is a fixed EMI and flexible repayment tenure. Generally, investors look for more funds to invest in equities when markets are down to cash in on the future rise in stock prices.

So, if you invest wisely in the right stocks, you can earn substantial returns and make a profit even after paying off your loan.

Since personal loans are unsecured, they usually come with a higher interest rate, typically ranging between 10% and 36% per annum. If your investment doesn't beat the high interest rate, then you could end up losing money. Investing in mutual funds or the stock market carries higher risks due to market volatility. If the market falls or your investment underperforms, you will still have to repay the loan along with interest. This may lead to a loss and additional debt burdens.

This option doesn't go well with people who don't have a stable income. This is because you need to set aside a certain amount every month to repay the EMIs. Failure to pay the EMIs may also negatively impact your credit score, making it difficult for you to get loans in the future.

Let’s understand how an investment funded through a personal loan could be helpful to make money.

For example, you have taken a personal loan of Rs 5 lakh at an interest rate of 13% per annum for 3 years. Then, your monthly EMI will be around Rs 16,850. The total repayment after 3 years would be around Rs 6.06 lakh, including the interest charges of around Rs 1.06 lakh.

If you invest this personal loan amount of Rs 5 lakh in a mutual fund that gives 11% per annum return for the same tenure, then after 3 years, your investment will grow to Rs 6.8 lakh, which is a profit of around Rs 74,000.

On the other hand, if your investment underperforms, then you may suffer a loss.