ValueWalk

Should you take out a loan for investing?

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Without really realizing it, many of us have already taken out a loan for the purposes of investing. Mortgages and business start-up loans are loans for which the funds are used as a type of investment, but what about taking out a loan for investing in things like the stock market? Is this a wise thing to do? What are the risks and pitfalls? What are the benefits?

andreas160578 / Pixabay

Loans for investing are essentially personal loans the funds from which are used to acquire assets. The value of these assets may fluctuate in either direction over time, as most investments do. They are, by nature, risky, as it is impossible to predict in which direction the asset will move. The hope is that the asset will earn the borrower enough to cover the principal borrowed plus and any associated fees, etc. Of course, this is not always the case.

The trouble with loans for investment is that investing on margin (that is, investing on borrowed funds) carries with it several associated risks. For example, let’s say you borrow $100,000 on the expectation of receiving 30% gains over the first year. If successful, great: you’ve just made money without ever having used any of your own funds. That is the primary reason people undergo this type of investment protocol. If the investment doesn’t pay off as quickly as you had hoped, however, you could very easily find yourself having to dip into your own pockets to repay the loan after having to sell the asset at a lower price than you paid for it. If you have enough liquid assets that repaying the loan would not be a financial burden, there is little to no risk to you. But what happens if you can’t afford to repay the loan? That could spell financial ruin for you. For most people, it’s not worth the risk.

Taking out a loan for the purposes of investing is very risky. Before doing it, take into consideration not only your knowledge about the markets, but also how you would repay the loan should things go sideways. If you have the means to repay the loan if your investment fails, borrowing money to invest can actually be a good way to make money without taking anything out of your own pocket. If, however, you don’t have the funds to back your loan if your investment goes wrong or if you aren’t sure you are a savvy enough investor, borrowing money through a personal loan for the purposes of investment may not be such a great idea. Being unable to repay a loan can cause serious damage to your credit and may cost you other assets like your home.

There are all kinds of loans available, even if you have bad credit or no credit at all, see  more details here. However, if you haven’t built up your credit or have had credit problems in the past, borrowing money for investment may not be a smart idea. Think about it this way: If you have had financial habits in the past that have led to issues you’re your credit, is it really wise to take out money to for the purposes of investing in something you cannot control?

It boils down to this: If you can’t afford to lose the money you invest, you can’t afford to borrow it. If you have the means and ability to pay off the loan plus any fees and interest if your investments don’t work out the way you had hoped, borrowing money to invest can make you a lot of money.