Taking a Personal Loan for Investing? Consider the Pros and the Cons

Most people apply for personal loans when they have a emergency like medical expenses, paying for unexpected expenses, etc. In general, taking a loan to invest is not what most people will do. But many people do have enough financial resources and assured income, that they can take this risk.

One very important point to note is that personal loans don’t come cheap. Generally, there interest rates exceed 15%. So when you want to use this borrowed money to invest in some opportunity, it should ideally give your more than 15% returns. Isn’t it? But 15% returns are not easy to get. Infact, as the returns increase, so do the risk of loss. So you need to be sure whether you can actually get that rate of return of you are just taking a blind bet.

Also understand that irrespective of whether you make money on your investments or lose it entirely, you have to repay the loan with interest period. That is an obvious point but important enough to get a mention.

You should also consider worst-case scenarios when taking this approach. If your investment does not pay off as expected, would you be in a position to pay off the personal loan from other sources? If the answer is yes, then you have your risks covered. But if the answer is no, then you should reconsider your decision to borrow and invest.

Not all investments pay back in near term. Some investments take time to play out and might even be years before you get the desired rate of returns. But unfortunately, personal loans are fixed and have to be repaid as per the agreed upon schedule. Repayments cannot wait if you are not making profits immediately. This harsh truth should be borne in mind at all times.

So remember that taking a personal loan for investment is a good (but nevertheless risky) option for very few people. So when you do take this route, you better understand all the risks that are in store.