When is it a good idea to take out a personal loan to invest?
In some scenarios, it may be worth using your personal loan for investing. This could be the case if:
You’re investing in career advancement. In some professions, earning a promotion or getting a more lucrative job offer might require a special certification or professional license. Borrowing a loan as an investment in your career might make sense if it increases your chances of earning a competitive income. Check the U.S. Bureau of Labor Statistics’ Occupational Outlook Handbook to learn more about job growth projections and median salaries in your field.
You’re increasing your income. Many people boost their monthly income by turning their hobbies and passion projects into side hustles or small businesses. If you’re looking to launch your own side venture, a personal loan could offer the funding you need to get started.
You have excellent credit. Your credit score is one of the biggest factors that influences how much borrowing a personal loan will cost you. If you have an excellent credit score — for example, a FICO score of 800-plus — you have a better chance of qualifying for a lender’s lowest interest rate, and you might not lose as much of your investment.
You can afford the monthly payment. Consider whether you feel financially comfortable making the loan’s monthly payment, regardless of how your investment performs. Make sure to factor in any existing debt you’re repaying now and other goals you’re saving toward (e.g., saving up for a home). If you still feel confident about your ability to repay the loan, this might be an option for you.
When is it a bad idea to take out a personal loan to invest?
You should carefully consider not just the pros but also the cons of using a personal loan for something like investing. Here are some scenarios where doing so might be the wrong move:
The investment is considered risky. When an investment has a higher-than-average chance of underperforming or offers above-average returns in a short period, it’s considered a high-risk investment. Investing in the stock market, for example, is considered very risky. Adding debt to your investment portfolio makes your investment strategy more volatile overall.
You don’t have strong credit. If you don’t have excellent credit, you won’t qualify for a lender’s lowest advertised loan rate. With some personal loan rates as high as 35.99 percent APR, the cost of the loan might be more than your potential investment return. To see your credit score from all three bureaus at no cost, visit AnnualCreditReport.com.
You can’t afford to have the investment fail. If you need the investment to deliver on its suggested returns to afford your personal loan, this route is a bad idea. No investment can offer a 100 percent guarantee on returns, but one thing is guaranteed: You’ll need to start repaying your personal loan immediately.
You have to pay high fees. Before you commit to a personal loan, be sure you know all of the associated costs. Origination fees can be as much as 8 percent of your loan amount, and the lender may charge you for paying your loan off early.
You’re at or nearing retirement age. As you approach the end of your working years, you should aim to reduce your expenses. Adding debt just as your income decreases could put your retirement savings at risk.
