Risk of taking Personal Loan and then Investing in Shares

Personal loan

Loans have become very common these days. Almost everyone we know has been taking some form of loan or the other. This includes education loans, home loans as well as car loans. The reason as to why people are opting for it is that they need to make purchases or investment but lack the funds. This is why they find it lucrative to take loans, invest and then repay the bank as and when they start earning. However, a common question that has been asked time and again is that is it wise to first take a personal loan and then invest in equity? Well, read ahead to find the risks involved and why it may not be such a good idea.

  1. Capital invested risk: Capital refers to the amount that you put in. this is the investment that you make in any business or shares, as the question is here. However, in case of shares and equity, there is no guarantee that you will be able to earn it back. In fact, the market conditions can fluctuate at any time. This is why it is possible that what initially seemed as a deal for the good, may end up procuring you losses.
  2. Interest rates: interest rates are charged by every bank and every moneylender. This is on the loan that you take. However, thought this is fixed, it can change as well. in case the interest rate suddenly goes up, it will imply that you need to pay more money to the lender. This will then give rise to a situation where you may not be well equipped to return your loan to the bank. Thus, you property also stands at a risk of being lost.
  3. Liquidity and concentration risk: This refers to the fact that a lot of make the mistake of investing in only one particular share. What happens in turn is that either we do extremely well or we end up losing all of it in one go. This is why it is recommended to invest in at least 2 to 3 different shares and companies. The strategy followed here is to simply have a backup in case one of the options fails. Thus, never let your funds get “concentrated”.
  4. Mismatch between tenure or loan and returns: Lastly, it is not in your hands to determine the time that you will need to make profits. The market is unpredictable and even certified experts have been proven wrong in the past. This is where a problem arises when the tenure of the loan and the rate of your return on investment do not seem to match each other. The tenure for the loan is fixed and failure to repay that within the stipulated time will cause you to face severe consequences and hassles.

Thus, it is strongly suggested that you must never take a personal loan to invest in shares. However, if you still feel that you are ready to take the risk and will be able to pull it off, then it is entirely your decision.

Anum

Anum Yoon is the founder and editor of Current on Currency. She loves all things personal finance, which is why you'll find her work all over the PF blogosphere.

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