Typically, individuals borrow finance to fund capital requirements for medical emergency, marriage, further education, foreign trips, besides others. However, some individuals may also borrow finance and use it as a tool for further investments. Though this is an effective way to obtain high returns, there are numerous factors that need to be taken into consideration.
The main aim you must keep in mind while borrowing for further investment is to obtain a higher rate of return on the investment than the cost of borrowing. It is imperative that your loan rate remains low, as it does not make financial sense to take a debt that has a high cost.
Following are four tips to keep in mind when borrowing a personal loan for investment purpose.
- Compare various loan rates
It is necessary to compare the interest rates of various lenders and choose the lowest one that meets your financial requirements. If the interest rate is high, you will have to rely on the returns received on the investment in order to pay the interest. Therefore, compare the investment’s average return rate and the loan’s rate of interest. Borrow for investment only if there is a considerable margin between the two.
- Use the right approach for investing
There are numerous approaches while investing like long-term buy and hold, short selling, and buying on margin. It is necessary to choose an approach that will guarantee payment for your loan EMIs. In case you opt for the long-term approach, you may have to wait for a relatively longer period to receive returns. At such times, you may have to make alternate arrangements for the required cash till the investment matures.
- Conduct investment performance analysis
Using borrowed funds to invest in the stock market is not a good idea if you are not aware of the associated risks. Conduct thorough research on stock trends, past performance history, as well as potential future earnings and then make a decision.
- Gauge the total cost
Besides interest rates, there are other fees to be considered while applying for personal loans online, namely processing fee, part-payment fee, and schedule amortization fee, besides others. These charges have to be taken into consideration as these may reduce your investment returns. Also, consider the cost of investment wherein you may have to shell out additional charges like broker’s fee and the fund management fee.
Remember, borrowing finance for investment through personal loans is a risky affair. There may be times when the value of your investment goes down. At such times, you still have to pay your regular EMIs. Hence, it is important to weigh the pros and the cons before you apply for personal loans online.
Moreover, you must have good knowledge about the financial instrument you wish to invest in; its past performance, trends, the rate of return, and other parameters. Go ahead with borrowing a loan and use it to invest only after thoroughly analyzing all the associated factors in order to make a well-informed decision.