Taking a loan for buying assets like real estate or a business seems reasonable and necessary. It is due to the fact that these assets almost always give high returns, and the business also grows over time. However, if you are taking a lot for an investment, i.e., “investing a loan”, then the return on investment (ROI) matters a lot. If your returns are lower than the interest on the loan, then obviously there is no sense in it.

But there is a common question among people, especially among new investors, and that is, “Should I take a personal loan for investing in the stock market?” Well, you will get the answer in this article of Rupee112.

What do you mean by taking a loan to invest?

In this practice, the borrower uses the funds to purchase securities, real estate, stocks, derivatives, and other assets. The borrower has an expectation that the return on these investments will exceed the overall cost of the loan, including the interest and processing charges. 

For some zero-risk assets, such as government securities, certificates of deposit, and bonds, it can be true. However, investments such as stocks, which totally depend on market conditions, the economy of the country, public sentiments, and also the global economy, are a risky affair. 

Is it wise to invest a loan in the stock market?

Before investing a loan in the stock market, you need to learn that there is a higher-than-average degree of risk tolerance associated with investing a loan. In case your portfolio performs poorly, you will not just lose your invested amount but also be obligated to repay the loan along with the interest. It will ultimately lead to substantial financial losses. If you can’t repay the loan, your assets may be seized (if the assets are put up as collateral), and there will be a huge decline in your credit score.

However, in case your stock performs well and the returns are exceptionally high, then you can easily repay your loan along with the interest and still be left with an ample amount of returns. In short, there is a high risk associated with taking a loan, but the returns are also good. If you are sure about market direction, then you can explore this investment option.

Pros and Cons of Taking a Personal Loan to Invest in the Stock Market:

Pros:

1. If the market goes up, you will earn more than what you would pay overall for repayment of the loan.

2. You get high flexibility to buy a range of stocks with the borrowed funds

Cons:

1. The overall amount that you have to pay after taking a personal loan is generally high, which is not easy to exceed through returns on stocks.

2. It may worsen your debt-to-income (DTI) ratio

3. Losses will be amplified, which can result in margin calls or default