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Does It Ever Make Sense To Take Out A Personal Loan To Purchase Stocks?

15 June 2017

Mathéo Gerard

If you're like many investors, you've seen a significant increase in your portfolio over the last year. Indeed, the average rates of return for all the top market indices remains at or above nine percent midway through 2017, with some indices boasting up to 20 percent returns in just the first six months of the year. If you find yourself without extra to invest during this time, you may wonder whether it's worthwhile to borrow money to put into the market during these times of peak returns, cashing out, and repaying it once these returns plateau. While this has been a risk that has paid off for many who use margin loans or other sources of borrowed funds to invest, it is far riskier than traditional investing and must be pursued only after considering all the potential repercussions. Read on to learn more about some of the risks you'll want to consider when seeking a personal loan for investment purposes. 

Can you afford to lose the money?

While investing is safer (and provides you a greater opportunity to hedge your bets) than casino gambling, the same mantra applies: never invest what you can't afford to lose. Although the S&P 500 has long since exceeded the peak it reached before the Great Recession, those who were forced to cash out at the bottom of the dip lost a substantial percent of their peak portfolio value; having to repay the full amount you borrowed after you lost 30, 40, or even 50 percent of it can be quite a blow. Before you invest, make sure you have enough other financial assets (or physical assets that can be easily liquidated) to cover the amount you'll need to repay or, at the very least, to make the required minimum monthly payments on the loan.

What interest rates can you obtain?

Borrowing money to invest only makes sense when you're fairly sure your return rate will exceed the interest rate you're paying. This means that borrowing money at credit card interest rates is generally a bad idea; even savvy investors are unlikely to be able to turn a 20 percent return over a short period of time. 

On the other hand, having access to personal loans at today's low interest rates can make it easier to achieve your desired returns, especially if the market indices continue to rise as they have been. You'll want to shop around for the best interest rate and terms before you commit to a specific loan or lender. 

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