Are you planning to begin your investment journey by taking a personal loan? Then this article is for you. Although personal finance is suitable for numerous purposes, you might have to think twice before using it for investment purposes simply because investments are risky. And there is a good chance that you might end up losing value, making the loan repayment process difficult.
However, in some cases, taking a loan to fund your investment can be profitable. Wondering when? Keep reading to find out.
Things to consider before taking a loan for investment
- Credit score
You require a good credit score to satisfy the various personal loan eligibility criteria set by the lender. This is because personal finance is an unsecured loan, and your lender will need proof of your creditworthiness and repayment capacity. So, before applying for a loan, make sure you have a decent CIBIL score.
- Risk tolerance
As they say, “never spend money before you have it”. If you need the investment to fetch you high returns to pay the EMIs, then you shouldn’t be borrowing a loan. While there is never a 100% guarantee of returns when it comes to investments, you’ll still have to pay a personal loan interest rate on your EMI payments. So, borrow a loan only if you have a stable financial position and can afford it even if the investment doesn’t deliver.
- Investment performance
Before you take a loan to invest in a financial instrument, carefully go over its past performances. Whether it is equity stocks or mutual funds, analyse the potential of returns and the market risks involved to make an informed choice.
- Expenses involved
When it comes to borrowing a loan, you must take all the expenses into account. Sure, you can determine the monthly EMIs using a personal loan EMI calculator, but that’s not the only loan-related expense. Lenders will levy a loan processing fee and some other charges over and above the EMIs. It is, therefore, prudent to have a clear idea of the total expense before you apply.
Should you take a loan to invest?
Investing is an excellent way to grow your wealth. However, if you’re borrowing funds to invest, you must have a keen understanding of the financial market. One of the primary reasons some investors fail to capitalise on their investments is that they lack knowledge of the market and the investment instrument.
After all, if you jump into the investment pool without proper knowledge, you can end up drowning in debt! So, if you can estimate the financial risks and your personal loan repayment capacity, there’s a good chance of winning. Better yet, consult a financial expert to get more insight into whether it is a sound financial decision.
Over to you
After studying all aspects of the investment avenue and accommodating the financial risks in your budget, opting for personal finance to fund your investment can be fruitful. Having a clear picture of your financial goals is also essential before taking this giant leap. Lastly, make sure to pick a trusted lender with reasonable interest rates and favourable repayment terms.