Should You Take Out a Personal Loan To Invest More Money? What To Know Before You Borrow
If you’re just starting to invest, you might be focused on the idea that the more money you invest, the more money you make. This might have you considering if you can and should take out a personal loan to maximize the amount of money you have to invest.
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Personal loans advertise themselves for an array of uses and potentially substantial dollar amounts. Using a personal to invest is certainly an option, though it is not always a use a bank will accept. Here are the potential risks and advantages of taking out a personal loan for your investment.
Personal loans function much like any other type of loan, but there are some factors to consider
The first barrier is the simplest. Some lenders, like SoFi and Upgrade, do not allow personal loans to be used for investing. Investing itself is risky, and if your investment fails, you’ll not only lose your own money but also the loan that still needs to be repaid.
Future surprise expenses like hospital bills would only compound the financial disaster. Should the investment appreciate, that still doesn’t guarantee that it will provide enough to counteract the interest on your loan.
Tax considerations enter the decision, too, because although personal loans aren’t subject to taxes, gains on investments are. You’ll need to investigate the effect of those gains on your personal finances.
Your credit score will determine how much you’re able to take out and at what interest rate. If your credit score is too low, you might not be able to get one at all. Generally speaking, you’ll want your credit score to be good or better before considering taking a loan, as defaulting on it will only make your credit score worse.
The application for a personal loan itself can cause a small hit to your credit score if the lender must do a hard inquiry to determine whether or not you qualify. It’s recommended that if you’re at or nearing retirement age, you should avoid taking out a personal loan in an effort to preserve your retirement savings as much as possible.
Investments offering a fixed rate of return – bonds, annuities, treasury securities and certificates of deposit (CDs) – are worth a look if those returns are enough to cover the interest on the loan.
If you’re granted a low annual percentage rate (APR) based on having an excellent credit score, that could give you an edge which makes this method of investing worth investigating.
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Ultimately, you’ll want to be mindful of your tolerance for risk and never rely on a guaranteed return on investment to offset the interest on your personal loan. You’ll also need to have a plan for paying for emergencies if you’ve used up your ready source of funds.
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