Are you planning to take a loan to fund your stock market investments? Here’s a fairly comprehensive overview to help you know whether taking a loan to invest in the stock market is the right option or not.
Is Using A Personal Loan To Invest In The Stock Market A Good Idea?
There was a time when loans were majorly used to tackle unforeseen emergencies, but the same is not the case today. Many people now consider personal loans as an investment option. Though investing the loan amount in properties like land or house is normal, it is quite risky to invest it in unpredictable affairs like the stock market. In this article, we’ve covered a few reasons that explain why using a personal loan to invest in the stock market is risky and the measures you should consider if at all you use the loan for such an investment.
Should You Invest in the Stock Market Using Personal Loan?
Financial experts highly recommend one to not invest the borrowed capital on an extremely unpredictable and risky investment option. Below are listed some reasons why you shouldn’t use personal loans to invest in the stock market.
- High-Interest Rate
The rate of interest for personal loans lies on the higher side. You have to pay a whopping 16%-18% of the loan amount as interest annually on average. However, because of the uncertainty of the share market, it could become quite challenging to get a return of more than 16% consistently. If the market crashes, you might not have enough time to pay back the interest of the loan or even the principal loan amount.
- Loan Repayment Risk
On a personal loan, you are expected to pay a certain amount every month to repay the loan amount. However, investing the entire loan amount in the stock market could act as an obstacle in the repayment process.
What Measures Should be Considered before using the Loan Amount in the Stock Market?
If you have decided to invest the loan amount in financing your stock market investment, there are a few factors that you must bear in mind for a better overall experience.
- Knowledge About the Investment is the Key: Several people make the mistake of rushing into an uncertain field like the stock market without knowing how the market really works and fail to generate the desired results. Therefore, it is essential to be well-versed with the stock market’s working mechanism before risking your borrowed amount. Initially, you need to analyze the market trend, read a number of books related to stock market investment, and practice with demo capital. These approaches can help you predict future trends as well as patterns.
- Keep an Eye Over the Interest Rate:
The decision to use personal loans for investing in the stock market should be taken after you have a thorough knowledge of the interest rates charged by the lender. A lower interest rate will serve your purpose in the best possible manner. Here, a personal loan eligibility calculator can help you compare different loans and choose the best option that has a lower interest rate. Lower the interest rate; the lower will be the monthly EMI, which, in turn, will help you invest more on your stocks. Hence, make sure that you evaluate your monthly budget and repayments carefully.
Though personal loans offer you a greater corpus of funds for investing in the stock market and could also help better your credit score when used wisely, there are still several considerations to be kept in mind before rushing in. It is always better to be careful and know all the guidelines to make an informed financial decision.