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Should You Use a Personal Loan to Invest?

Even though it’s difficult to invest when you don’t have much capital, you have the option to apply for a personal loan to get your feet off the ground. However, there are a couple of things that you need to consider before thinking about applying for a personal loan to make investments.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Mann (Silvermann) is an experienced investor, financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO

Experience

Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Mann (Silvermann) is an experienced investor, financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO

Experience

Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. Transparency is a core value for us, see how we make money.

Table of Content

Most people have the understanding that in order to accumulate wealth, you have to make strong investments. 50% of Americans invested in the stock market in 2015. This is proof that making investments is a common way to get wealth. Many Americans ask themselves whether or not you should use a personal loan to invest.

Personal loans offer a flexible form of finance, as they can be used for practically any purpose. In this chart compiled from LendingTree consumer data, you can see that debt consolidation is the most common reason for taking out a personal loan. The least common reason is for home improvement. This is likely due to more advantageous products that can be used for home improvements such as home equity lines of credit.

percent of Personal Loans by reason

Is Borrowing to Invest Right for You?

Even though it’s difficult to invest when you don’t have much capital, you have the option to apply for a personal loan to get your feet off the ground. Even though there are risks, just know that investing is not an art, but science. None the less, getting a loan is a great option if you use the right methods.

There are a couple of things that you need to consider (as well as the usual considerations )  before thinking about applying for a personal loan to make investments.

  1.  Consider Loan Rates and Repayments

Always look at the interest rates and monthly payments of a loan before applying for it to invest in stocks. Moreover, if the interest rate of a loan is too high, you have to make big gains in the stock market to pay it off. This also means that you won’t have any profits left for yourself. It’s wise to get a loan that has a low interest rate, especially if you have other debts such as a student or automotive loan.

Also, keep in mind that nothing is wrong with having good debt if you have the finances to pay it back. If you don’t, it isn’t wise to take out a loan to contribute towards paying your investments.

  2. Test Your Knowledge About Investing

The average person doesn’t know about investing. As a result, this can make investing seem frightening. The 2009 financial crisis gave a lot of people a scare when it comes to investing. On the other hand, investing is not a hard concept. It’s just important to have a good understanding and a good knowledge base in regards to investing.

It’s best to speak with an investment advisor to make sure that you are investing in a stock that has a good track record. Doing so will give you a lot of clarity on a stock making it easier for you to predict how the stock will perform in the future.

  3. Understand The Risks

Furthermore, it's possible to get a personal loan to make investments. If you are a witty person, you can also use this opportunity to improve your credit score. Keep in mind that you are taking a risk in investing in this way. If the loan has a high-interest rate, you can lose more money when you are suffering a loss. Remember to be careful always.

If you watch any news, you can plainly see that the market can change in the twinkling of an eye. Evaluate whether or not you can handle the markets up and down swings before taking out a loan to invest.

Since borrowing money to invest in stocks is a risky venture, only investors with experience can truly benefit. Ask yourself the following questions if you’re interested in using this type of strategy:

  • If you get a margin call, do you have a secure income from a source such as your salary to top up the loan?
  • Is your marginal tax high enough to get additional tax benefits?
  • Are you committed long-term? Gearing is a medium to having a long-term strategy (at least 5 to 10 years).
  • Do you have a plan in place for radical changes such as having a child, or decrease in income?
  • Will you panic if your investments in the market perform poorly?

It is vital for you to get financial counseling before you start investing. Also, if an investor is in association with the company they recommend you to invest in, that investment may not be the best option for you. One way to tell is by looking at your counselor’s financial services guide to see what companies they are in affiliation with.

How Do I Get a Personal Loan?

If you are looking to get a personal loan for a certain reason, you will want to know what the process entails. This guide will help you understand the process.

Step 1: Evaluate Your Current Situation

It is essential that you take stock of your financial situation. A personal loan with a reasonable repayment rate is possible only if you can show the lender clearly that you are able to pay off all of your debts without any problems.

You should therefore do your own assessment before you apply to ensure that you are able to afford the repayments.

Look at exactly how much cash you will need from the personal loan and then use a personal loan calculator in order to see what your expected monthly repayments will likely be. You should ensure that you have sufficient income to cover these monthly repayments. Also, you should review your credit score and make any necessary improvements. Because the lender will base a lot of their decisions on your credit score.

There are a number of factors that influence personal loan APRs. One of the factors with the most weight is credit score. If you have a lower credit score, you represent a greater risk to the lender and this is reflected in the rate. In this chart compiled with LendingTree customer data, you can see that those with a 720+ credit score pay an average of 7.63%. At the other end of the scale, those with a poor credit rating of less than 560, the rate shoots up to an eye watering 113%.

Personal Loan Average APR by Credit Score

Step 2: Take a look at the Different Options

After you have done a self-assessment of your finances and determined the amount of a loan that you require and how much you can afford to repay it, you can start looking for a lender.

If you have a poor credit score, certain reputable lenders will ask you to have a co-signer in order to get a personal loan with bad credit. If they are concerned about your credit score, they might ask you to provide collateral, such as your vehicle or home as collateral.

Most people with a good credit score won't need to have a cosigner or collateral. While traditional banks place great emphasis on credit scores, there are companies that can help borrowers with bad credit.

Although credit unions are often the most affordable, the amount you can borrow might not be as large as what you would find elsewhere. You should always read the fine print to ensure you understand the fees and repayment terms.

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Step 3: Submit your Application

Once you have found a lender that suits your needs, you can submit an application. This can be done online, and most of the information is self-explanatory.

You will get to see the terms and conditions of the personal loan so you know what you are getting yourself into. Some documents may be required, including a payment slip, proof of address and a photo ID.

Step 4: Accept the loan

The lender will inform you if you are approved. The terms can be finalized and you can accept the offer. You will usually receive your funds from traditional lenders within one week. However, online lenders may be able to provide funds in a matter of days.

A good idea is to create an automated system that will allow the money to leave your bank account each month for the monthly payments. This will ensure that you don't forget to pay your monthly payments.

Compare Personal Loans Before Apply

Many lenders will offer personal loans to customers. There will be many types of lenders available and each one will have its own unique approach.

The terms and conditions of your loan will vary, as will the interest rate and repayment schedule. These are some key points to remember when comparing personal loans.

  • Adjust your Expectations

You should know what terms to look for when comparing different types of personal loan options. People with good credit ratings and other financial records will typically get the best rates and most secure options.

You don't want to compare options for people with poor credit scores if you have poor credit. A Better Business Bureau will hold legit reviews from borrowers, assigning the lender a rating. This is a great way to quickly identify red flags.

A lender with at least a few decades of experience in supporting borrowers is a good choice. They are familiar with the intricacies of loaning money and will be around for many more years.

People will be able to get personal loans from a variety of different lenders. These lenders will come in a variety of shapes and sizes, each with its own unique strategy.

The terms and conditions, as well as the rate of interest you must repay on your borrowings and the payback schedule, will normally be different. When it comes to comparing personal loans, there are a few things to keep in mind.

  • Deal Only With Trustworthy Lenders

When comparing different lenders, you should only examine those who have an excellent track record. The last thing you want to do is take out a loan from an untrustworthy firm.

This can result in a variety of concerns, including hidden costs, credit score issues, and general aggravation.

Check to see what kind of safeguards and certifications the lender has in place. Big banks, of course, will have a reputation for being trustworthy and well-regulated. Make sure you complete your homework on any potential lenders you're thinking about.

  • Negotiate Interest Rates

The amount of interest you will pay on the borrowed sum will be one of the most important determining elements in whatever lender you choose. You should compare the APRs of different personal loans.

This provides an objective benchmark against which you may compare the various solutions without being confused by language or verbiage.

  • Repayments Terms

After looking at the interest rates offered by different lenders and having a shortlist of potential options, you will then want to dig a bit deeper to look at the other terms of the personal loans. You want to make sure you aren't caught off guard by any unexpected fees or expenses.

Examine the repayment terms and any penalties that may apply if you fail to make a payment. You could also wish to investigate if you have the option of paying off the debt in a lump payment before the deadline. When comparing the various possibilities, all of the terms should be taken into account.

How to Choose a Personal Loan Company?

If you are looking for a personal loan company, then there are a few different things that you should be considered. This in addition to the standard information about rates and payment terms.

First of all, you want to be dealing with a lender that will value its borrowers. This means that they will have a good customer support system in place, allowing you to get into contact with the support team whenever you need to.

This could be to ask them a question or to make changes to your current plan. Check to see if there is a variety of ways to contact the customer service team.

It is also a good idea to do some research into the type of reputation that a given lender holds. This can be done through word of mouth by asking friends and family about their experience with a given lender.

It is very easy to search online to get a good idea of an objective review of the lender’s offering. The likes of the Better Business Bureau will hold legit reviews from borrowers, assigning the lender a rating. This can be a useful way to quickly see if there are any red flags.

Finally, you will normally want to deal with a lender that has at least a few years of experience supporting borrowers. This means that they know the ins and outs of lending out money and that they are going to be around for many years to come.

J.D. Power U.S. Lending Consumer Satisfaction 2020

The Pros and Cons of Personal Loans

There are many pros and cons to a personal loan decision. This will enable you to evaluate your options and determine what is best for your situation. Let's start with the benefits:

 If you're looking to fund a purchase without having to put up any form of collateral, a personal loan will be a good option. 

A personal loan will allow you to borrow the money without any collateral or insurance. Although some lenders may ask for a cosigner if you have poor credit, it is rarely necessary.

A personal loan offers more flexibility than a student loan, mortgage loan or car loan. Because you don't have to use the funds for one purpose, this is a great advantage.

 Instead, you can decide how to spend the money. You can also split the money into several different uses.

Credit cards are useful for certain purchases but they can also have high interest rates if you miss your payments or only pay the minimum monthly.

If you have good credit, personal loans are therefore more affordable in the long-term because they don't require you to pay as much interest.

Unlike certain financial products, you will have plenty of different lenders to consider for a personal loan. This applies to credit unions, big banks, online lenders, etc.

You will therefore be able to shop around in an environment that is competitive for the best rates and terms without any hassle.

 Because personal loans are unsecured, they have higher interest rates. Personal loans typically have an interest rate of 12 to 20% per annum, which is about 2-3 percentage points higher than other loans. People who lack sufficient resources might find it harder to repay their loans.

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There are strict guidelines for personal loans. Many banks require applicants to have a certain income before considering an application. Also, the applicant's credit score will be scrutinized. A low/average credit score can lead to an applicant's application being rejected.

 Lenders won't let borrowers change the repayment terms they have already chosen. Borrowers can choose the repayment term that suits them best. The loan cannot be prepaid or paid in part. You must pay the entire amount. You could face legal action if you fail to pay your EMIs on time.

 A personal loan does not offer everyone the flexibility it offers. Because they have the money, some people may end up spending it in a meaningless way. Many people might not like the additional monthly repayments and it could cause a significant strain on their monthly paychecks.

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What Are The Different Options Of Investment?

There is a well of knowledge to digest regarding investment in itself. To help you move forward, there are some great links that will show you what a good investment looks like. They will also broaden your knowledge regarding investment mechanisms and assist you in understanding types of investments that you highly encounter in your own life.

Moreover, make sure that you familiarize yourself with the terms below this text. The term represents paraphernalia that you’re investing in.

Mutual Funds

This type of investment strategy gives an individual the opportunity to put their money together with other investors to reach a common goal. This is a very typical way of how people get stocks, bonds, or other securities that is a challenge for people to take individually.

If you want a great way to diversify your investments, then getting a mutual fund is a great way to do that.

You can use and understand them easily. On the other hand, they do have disadvantages such as not enough liquidity, hidden fees and high sales charges.

Stocks Investing

Stocks, also known as shares or equity, are common to many investors. Having a stock means that you own part of that particular company. This gives you the right to have part of the company’s earnings as well as its assets.

Moreover, purchasing a stock gives you access to be a shareholder in that company. You also have the privilege, to vote in a shareholder’s meeting. In addition to, you’ll get dividends, which are part of the profit, at the end of the financial period.

Investing in stocks yields a greater return on investment in comparison to bonds and other securities. Keep in mind that there are limitations on the potential of the return. It’s important to keep an open mind regarding losing a portion or all of your investments.

With the introduction of low cost brokerage firms, more people are gaining access to investments. However, as this chart showing the value of directly held stocks shows, these values have remained fairly stable.

The data from FED Survey of Consumer Finances shows that in 2001, the average by family value of directly held stocks was $277,000. This dropped slightly in 2004, but apart from 2010, there has been a general upward trend.

Directly Held Stocks

Bonds

This type of investing is the result of an investor lending money to the bond issue in exchange for payments on interest.

Bonds are classified as fixed income security. To an investor, buying a bond is the same as lending your money to a specific company. That company in return gives you your money back with interest.

For those of you who follow the investing rubric, you know that bonds are an essential investment. You don’t have to worry about your assurance. Your assurance and safety are within the bonds. Bonds are also stable in the midst of fluctuation of interest rates.

Furthermore, investing in bonds is not like a typical investment that has many risk factors. With bonds, you have fewer risks; this means that you have a low rate of return that’s normally lower than other securities. Learning more about bonds will give you a greater understanding while trading.

Savings bonds are one of the safest investments, but over time investors have become a little more confident about taking on riskier investments. As you can see from this chart using FED Survey of Consumer Finances data, while the average savings bonds per family was $11,000 in 2001, it has dropped to an average of $8,000 in 2019. This is slightly higher than in 2004, 2010 and 2013, but it does show a general downward trend.

Savings bonds Holdings by Family

Property Investment

Investing in real estate is a great avenue of how you can achieve a greater return on investment.

A typical owner gains in two distinct ways while investing in property. First being the rent tenants pay. The second being the property value that accrues as time goes by; otherwise capital gains.

Even though it’s possible to yield greater returns with real estate, owning and buying real estate are two completely different things. Moreover, there is more to it than surface level components. Property investment is very different from bonds, stocks, and other investment options.

Furthermore, attempting to withdraw from your property investment is very difficult. This type of investment is not a liquid type of investing. If you try to get the money you need, you more than likely will either sell your house or increase the property mortgage. Even though it seems to be an easy task, it’s not. Even if it was an easy task to do, you have to take into account property valuation costs and real estate agent fees.

If you decide to obtain property, that means you’ve set your eyes on long-term returns. You’ll more than likely see little to no profit in the short-term. This is because you may desire to take care of other expenses such as the mortgage, insurance, etc. As a result, people who invest in real estate want to benefit from their profit as prices increase.

Commodity Investments

This type of investment is another option that investors should look in to. Investing in commodity means that you are investing in resources that affect the economy as a whole such as beef, oil, coffee, etc.

Furthermore, you also have the option to consider investing in gold or other expensive metals too. The potential for these investments offers a good return.

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