Over the past years, the rise of trading apps and the greater availability of information have opened the way to what has today been dubbed as the Robin Hood Era of the stock market. And, as the number of successful retail investors grows, it is nearly impossible to sit back and not take part in the game.
Luckily, you don’t have to! Thanks to today’s trading platforms, high-yield investments are at your fingertips. But is taking out a personal loan to invest in high-risk assets a good idea? It may be – but there is a bit more to keep in mind.
Borrowing Money For High-Yield Investments: What Are the Risks?
The stock market has become increasingly visible and accessible, giving new and seasoned investors the chance to pinpoint the best stock or funds to invest in.
But what if you have found the perfect opportunity to grow your capital gains and are low on funds? A personal loan is a quick and efficient way to access more money to invest, thus leading to greater returns.
However, no high-yield investment comes without a high level of risk. And, before using a personal loan as investment money, it is important to keep in mind what major risks you’ll be facing:
- Greater losses and higher amounts to repay – if your investment falls in value, you will need to repay your loan plus interests.
- Limited returns – if your investment doesn’t perform as expected and you were counting on that money to be your income, you might not have enough funds to repay the loan.
- Capital risks and losses – capital losses are always a risk for investors. However, if you have invested borrowed money and you have to sell your assets at a low price point, you might not have enough to cover the loan amount.
- Variable interest rates – personal loans come with associated interest rates, which can significantly increase the amount you’ll owe. Make sure to account for these rates.
3 Pieces of Expert Advice You Need Before Taking Out a Personal Loan For High-Yield Investments
The only time when taking out a personal loan becomes a surefire way to increase your profits is when expected returns are high and risk levels are low. However, it is in the nature of high-yield investments to be riskier and more speculative than savings bonds and funds.
Yes, you can consider “investing a loan” and, as the stock market is powered by first-time and retail investors, this has become all the more common. Nonetheless, working with an experienced investment advisor can be invaluable in this case – start with the three expert tips below.
Evaluate Your Credit Score and Interest Rates
According to data by Experian, the national average for personal loan interest rates is 9.41%. However, this percentage can vary significantly – between 6% and 36% – according to your credit score and financial history.
Before taking out a personal loan, make sure you have an excellent credit score, ideally over 800, to secure the best interest rates and keep your cost of debt low. Don’t forget that no matter how your investments perform, you will need to repay your loan’s principal and interest rates!
Understand Your Risk Tolerance
Whether you are investing in crypto or a certain stock, high-risk investments can be volatile. This means that, while they can perform much better than low-return investments, they can also drop and rise in value drastically and within hours.
Because of this, it is crucial to understand what your risk tolerance is and only invest what you are comfortable losing.
Additionally, keep in mind that you will need to start repaying your loan straight away, regardless of how well or badly your investment is performing.
So make sure to always have enough cash to cover your loan’s monthly repayments – at least until your investments start to perform better!
Keep Timings in Mind
While it might be hard to forecast the performance of high-yield investments, it is necessary to set clear expectations about when they’ll start performing above the benchmark or mature.
Then, you should match your loan terms to the investment’s expected future performance. Ideally, you should opt for investments that will mature within 90 months and offer a return potential at least 10% higher than the cost of the loan.
Find the Best Personal Loan Provider
The lender you choose can make a difference in whether it makes sense to use borrowed money for high-yield investments. For example, options such as SoFi personal loans give you the flexibility of customizing the loan’s amount, terms, and rates to your needs.
Depending on your situation, you might even be able to access same-day funding and buy the right asset at the right moment!
