Can You Use a Personal Loan for Investment Purposes?

Investing is a good financial tool when done properly. According to a CNBC article, investing as early as you can is one of the best ways to attain financial freedom. However, it can be quite daunting for many, especially as the costs of living continue to rise. After all, you often need a substantial amount of money ⁠to invest — and most people would rather spend on their day-to-day survival and save for their future with fewer risks.

If you want to try investing to reap huge profits later in life, you can take out a personal loan and use it to fuel your investments. However, using a personal loan to invest has a unique caveat: in the event that your investments lose their value, you’re left to pay off a loan you could’ve avoided in the first place.

In this post, we’ll explore the pros and cons of using a personal loan for investment purposes.

Why it’s a good idea to take out a personal loan to invest

Taking out a loan makes sense if you’re confident that the money you borrow will grow or increase your income. For example, using a personal loan to invest in a promising business venture is a wise decision, as this may generate income for you instantly. You can also use a personal loan to invest in yourself and take certifications or licenses to increase your earning potential. In addition, using a personal loan to invest in stocks that pay you a monthly dividend (such as Gladstone Investments and Stag Industrial) may be a good idea, as you'll also get to enjoy your dividends in full once you’ve paid off your loan.

Another instance wherein it might be a good idea to use a loan to invest is if you have a good credit score. When you qualify for a personal loan with low interest rates, you can make money off your debt — because what you pay in interest charges is less than your returns.

Why taking out personal loan to invest may not work

As we’ve mentioned, you run the risk of paying off an unnecessary loan if you use a personal loan to kickstart your investments. In addition, you could also end up underwater due to a personal loan, which is when you owe more than you could get back by selling off an investment. This often happens with personal loans used to invest in real estate properties. If the real estate market tanks, selling off the property won’t be enough to pay off the initial loan. It can then put the financial future of the borrower in disarray.

What’s more, failing to pay off your personal loans can sabotage your borrowing capacity. An article about what affects your credit score by Petal Card highlights how late payments can negatively affect your credit score — especially if there are several of them. And when your score gets lowered due to this reason, it's harder to get it back up. Aside from your credit score dropping, you may find it harder to take out more loans, get a new credit card, or even suffer from high insurance premiums in the future.

So, should you take out a personal loan for investment purposes?

Yes and no. At the end of the day, it’s up to you to decide whether taking out a personal loan to invest is worth it or not. Before making a decision, it’s best to research and weigh up your options first before going through with a personal loan. On top of this, The Balance notes that talking to professionals like financial advisors and planners can help you decide if your investment strategy is worth pursuing. Whatever you choose, make sure you're not making a decision on a whim.

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.