Taking out a personal loan, in the hopes of making money, is seriously risky business. If you are such a savvy investor that you are sure you will make a good profit, then you should have built up a sizable investment fund by now, in which case, you would not need a personal loan. If you are not an experienced investor, with a proven record of success, then you are really borrowing money to gamble.
Any investment has its risks. It is hard work and no one gets it right all of the time. Many times the experts get it wrong.
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First let’s take a look at how you plan to make money with a personal loan.
If you are taking a personal loan to finance a new business then this is a brave and admirable idea, but still very risky. Sadly, many new businesses fail. If you have taken a personal loan to fund a business and it fails you will be stuck with the debt of the loan, probably additional debts from the failed business and no income to cover any of these expenses.
No one starts a business expecting it to fail but sadly it happens all the time. It happens in all industries and any type of business poses a certain amount of risk. If you know the business you intend to start extremely well then do a lot of research first. Do not rush into anything. Look at the potential worst case scenario and how you will cope with that if it does happen. Apart from the financial stress, it will also be a major blow emotionally. You need a backup plan in case the business does fail.
If the business is a success then obviously it was a worthwhile loan.
If you are borrowing money to invest in speculative investments like the stock market or forex, that is even more unpredictable and risky. It is also completely beyond your control. If it was that easy to invest money and make a profit, everyone would be doing it and no one would have to work.
If you are new to investing, start with a very small amount that you can afford to lose without too much pain. Learn as you go and slowly build up your portfolio and your capital from your investments. If this works, you will have a growing amount of money to invest. If it fails, you only really lost the original amount that you put in and at least you are not left with a large debt to repay. Start small and build gradually would be my advice.
If you are an experienced investor and you come across an opportunity that you are reasonably sure will make a good profit, then you can consider a loan to invest in order to make more money. Remember, it needs to be profitable after covering the cost of the loan as well as inflation. Just go in with your eyes wide open, understand the risk and have a plan in place in case the investment fails.
Understand your ability to deal with risk
An important factor to consider is how risk averse you are, or should be. A younger person, for example, is able to take greater risks as they have more time to earn money to cover a loss, if it occurs. If you are older and retired or near retirement, you have very few opportunities to make up for that loss. Either way, young or old, no one wants to be paying off a loan for years for an investment that went sour.
If you do want to go ahead and borrow money in an attempt to make money, consider the following factors:
Understand the cost of the loan
You need to know what interest rate you will be paying as well as the monthly and total cost of the loan. Even if your investment is profitable, it still could still be at a lower rate than the interest charged on your debt. At the same time, you need to consider inflation as well. If your investment is just covering the loan costs, then you are not making any money.
Apart from the interest rates, it is important to look at all the other costs as well. Your investment needs to cover these costs as well as the capital and interest repayments.
Consider the monthly payments
If you expect the investment to perform well and pay returns from the start, you will be able to use this money to service the loan, provided things go as planned. If the investment is more long term in nature, make sure that you will be able to cover the monthly cost of the loan until the investment matures and you can take out the profit you are hoping to make.
Do thorough research into performance of the investment
Although historical performance is no guarantee of future profits, it is important that you study everything carefully before making a decision. If a particular stock or share has done very well and you borrow money to invest in that share, you could find that you have waited too long and you are buying the share when the price is at its peak.
Again, if it was that easy, we would all be rich. Timing is critical with buying shares and, as previously stated, the experts often get it wrong. They are normally investing with a large, diversified portfolio so if one or two aspects underperform, they normally make up for that with other investments in different markets. If you are borrowing money to invest, you will not have that luxury and will probably only be dealing in one or two shares or investments markets.
If you are going to borrow money in the hopes of making money, be well aware of the risks and have a contingency plan if the investment does not work as expected. Proceed with extreme caution.