Should You Use a Personal Loan to Invest?
When it comes to growing your wealth and building a secure future, investing can be an important tool to accomplish this. Through investing, you can buy assets and own them as they, hopefully, accrue and grow in value — whether you’re investing in your home, a retirement account or stocks.
Maybe an investment opportunity comes along that you feel you can’t miss — but you don’t have the funds available to take advantage of it. You might be tempted to borrow money or take out a personal loan for investment.
But any form of investing can carry some risk, which is only increased if you borrowed to make the investment in the first place. If you’re wondering if you should use a personal loan to invest, here’s what you should consider as you make that decision.
Should you use a personal loan to invest?
Investing is a wise financial step — but as with other money moves, how and when you invest matters a lot.
“Investing consists of dealing with one thing: the future,” said Riley Adams, a certified public accountant and founder of the investing blog Young and the Invested. “Because none of us have perfect predictive powers, risk is inescapable.”
If you’re using borrowed funds or a personal loan for investments, this only increases the amount of risk you face. It might push the risk high enough that investing isn’t worth it if it means getting into debt.
You’ll need to practice caution if you choose to take out a personal loan to invest, and should also be aware of and comfortable with the risks. Here are some of the potential downsides that could make using a personal loan for investments a problematic option.
Your investment could tank — and you’ll still owe the debt
If you’re using borrowed funds or a personal loan for investments, this will multiply the inherent risk of investing.
If you invest with cash, it will be disappointing if your asset loses value. But if you invest a loan only in having the asset depreciate, you could end up owing more than the asset itself is worth.
You could end up “underwater” on your personal loan for the investment, owing more than you could get back by selling the investment. This can damage your monthly budget if you struggle to repay this personal loan, and can even lower your net worth.
You could pay more in interest than you earn in returns
When using personal loans for investments, you’ll have costs of interest and the burden of making monthly payments on top of the increased risks. “Because of this, your expected return on your investment must rise commensurately in order to account for this higher capital cost,” Adams said.
Simply put, your annual returns or growth on an investment will need to exceed your APR, or you’ll be losing money — so to justify a 10% APR, you’d need to get a 10% or higher return on an investment, Adams said.
But not every borrower will be offered low personal rates that could make this work, nor are there any guarantees that your investment’s performance will match your expectations. “As you seek higher returns you encounter higher risk and therefore more uncertainty,” Adams warned.
Your payments could become unaffordable
Lastly, debt poses a risk to your personal finances no matter what you use it for. That’s because whenever you borrow money, you’re making a commitment to repay it at a later date.
Based on the amount you borrow and the personal loan terms you choose, you’ll face a fixed monthly payment until the debt is gone. This will add an additional expense to your monthly budget that you’ll need to plan for.
However, just like you’re not guaranteed a return on investments, you can’t always guarantee that you’ll repay a personal loan that you borrow. Unforeseen circumstances, from everyday hardships like a job loss to national crises such as recession, can put you in a tough position to make debt payments. This could set you up for even worse outcomes, such as defaulting on the loan and damaging your credit.
You might have wiser options to borrow or invest
As you consider ways to invest, it’s important to look at other options beyond getting a personal loan for investments.
There are some forms of high-interest credit you should definitely avoid, according to Adams, such as credit cards. But even personal loans can be tricky, and there could be more affordable alternatives.
Adams pointed to margin loans as an option he had used in the past when he wanted to borrow to invest. If you trade on margins, you can get a loan from your broker to buy more stock shares, with your existing stocks acting as collateral for the loan. These loans often have much lower interest rates than personal loans.
Other less expensive or more flexible borrowing options could include a home equity loan, personal line of credit or home equity line of credit. Explore all products to make sure you’re finding the best product to use as leverage.
Overall, taking on a personal loan will get you further into debt and add a new financial obligation to your monthly budget. It’s wise to limit borrowing whenever possible and only use credit when you need to. And the bottom line is that investing is not a need, and can most often wait until you’re in a position to invest with cash rather than credit.
When using a personal loan for investments might make sense
There could be some specific situations in which using a personal loan for investments could go over well. Here are some signs that this move could pay off for you.
You can leverage your good credit for low rates
The lower your personal loan rates, the less you’ll pay to borrow. If you can qualify for the best personal loan rates, you’ll stand to maximize your net return on any investment for which you use a loan.
Some of our personal loan partners, for example, offer APRs as low as 3.99%. However, lenders typically reserve these low rates for applicants with excellent credit scores and credit histories. If you do have excellent credit (usually defined as a FICO score of 740 or higher), you’ll have a better chance of getting low rates.
Before applying, make sure you shop around and check lenders’ terms. Some don’t allow borrowers to use personal loan funds to invest, for example. You’ll also want to compare APRs, loan fees and terms.
One of the easiest ways to start your search is with LendingTree’s personal loan shopping tool. After you provide some brief details about the loan you’re looking for, the tool may match you with personal loans from up to five different lenders that best fit your needs.
Your investment will increase your income
Using a personal loan to invest can make sense if you’re using for a venture that will immediately and directly start generating an income. This might be the case if you want to use a personal loan for a career or business investment.
You might use it to cover the costs of professional training or certification, for example, and boost your value on the job market. A personal loan can also be an accessible way for entrepreneurs and side hustlers to access the cash they need to take their business to the next level.
Landon Eskew, for example, used personal loans and other forms of credit to get his water source business in North Dakota, Highline Water LLC, off the ground. “It went towards buying equipment and a little acted as a cushion to get me by for a short time until money started rolling in,” Eskew said. As a result, “I was able to keep the company going and pay it back with no problem.”
If you’re interested in using a personal loan to give your career or business a boost, make sure you research the potential payoffs. Also, make sure that the expected boost in your personal or business income will be enough to cover the loan payment and give you a solid return.
You’re confident in an investment — and comfortable with the risks
“Risk is something which can be estimated and managed to your advantage,” Adams pointed out. Identifying potential trends in a particular stock can help you take advantage to boost returns, he said — and using credit such as margin loans or personal loans can be “a tool to enhance that return.” In fact, Adams recently did just that, using a margin loan to buy more of a stock he already held.
To accurately estimate the risks, however, he first did his research, poring over earnings reports and performance metrics of both the company he was planning to invest in and its competitors. “After reading numerous earnings call transcripts, press releases and news articles, I developed a strong feeling the stock stood to move upward in the near future,” he said.
Even then, Adams weighed the potential downsides. “I knew the risks going in and the possible rewards I stood to make if I made an accurate prediction,” Adams said. “The trade could just have easily gone against me and cost me some much-needed funds.”
In the end, Adams’ hunch proved true, and his returns allowed him to repay the margin loan. He had enough left over to pay for a trip to Europe for his first wedding anniversary.
His experience is proof that borrowing to invest can pay off — but it also provides a good blueprint other investors can follow. That is, do your research, understand the risks and weigh these factors and the costs of borrowing before you take the plunge.
For most people, it will make more sense to use savings to invest, or carve some room out in their budget and invest a little at a time.
If you can afford to take on some more debt, you understand the risks and you’re confident in an investment, taking on a personal loan can be an option. Just be sure you find the best personal loan for investment, by comparing different lenders and borrowing options.
This article contains links to MagnifyMoney, which is a subsidiary of LendingTree.