A personal loan is an unsecured loan. This means you do not have to put any collateral as a security to the lender. It is one of the most popular types of debt people use for personal use. Personal loans interest rates are low compared to the previous year, so many of us are tempted to take out a loan for various reasons like investing. Depending on your credit score, some people can qualify for a personal loan amount of Rs. 25,00,000. Before you do this however, here are a few things you need to know.
Is using a personal loan for investment purpose a good idea?
Borrowers can take out a personal loan and invest the amount, but whether that is a good idea depends on the investor’s financial condition or goals. It is a huge gamble but can also pay off if you play your cards right. Fullerton India personal loans online can provide personal loans at low-interest rates. If you are using a loan to invest in stocks or other schemes, here’s what you need to know to make sure you are on the right path.
- Ability to pay off the loan and good credit: The better your credit score, the better schemes you will be getting on interest rates. If you qualify for the low-interest rates, you can consider taking a personal loan for investment purposes like investing in stocks or buying a property. However, you will need to have a good credit score to qualify for lower interest rates. An excellent credit score is a score that is 750 or higher.
- A clear ROI on investment amount: All investment comes with the risk, but some come with lower risks than others. If you can purchase something at a low price that is expected to increase in value, then a personal loan can help you facilitate the transaction.
- Generation of income:Using a personal loan makes sense when your invested amount generates income. For example, you can invest in your business by purchasing new equipment to create a new stream of revenue.
When it is wrong to use a personal loan for investment purpose
If you take the above steps to invest your amount, then you have made a smart move. But there are many red flags when it comes to taking a personal loan for investment purposes. If you fulfil the below conditions, then it is wrong to take a personal loan for this purpose.
- Bad credit:People with bad credit may have to pay higher interest rates, which can be as high as 35.99%. Higher interest rates will increase the EMI amount Thereby increasing debt burden.
- Can’t afford investment failure: One should never invest money that they can’t afford to lose. No matter what you choose, investment comes with an inherent risk. If your investment doesn’t pay off, you will still have to repay the debt.
- You have difficulty in paying EMI’s on time:Debt is called liability. No matter how you use a loan, it creates a burden of repayment that can put your financial planning at risk. If you somehow lose your job, it would put an unnecessary strain on your budget.
Borrowing to invest is filled with risks. If you decide to take a personal loan for investment purposes, it’s crucial to research the nature of the investment and the risk you are undertaking. Investing in low risk (but long term) items like mutual funds, gold or property may be a better idea. However, do remember that whatever happens, you will still have to repay the personal loan through monthly EMIs. So it would be wiser to avail the loan only if you are sure that you will be able to pay it back, irrespective of the outcome of your investment.