Can I borrow a personal loan to invest money?
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UPDATED: Jul 24, 2013
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Yes, consumers can borrow a personal loan and invest the money.
However, borrowing a personal loan to use for investment doesn’t always lead to a happy ending, let alone a profitable outcome.
Since not everyone has the money needed to contribute to worthwhile investments, such as stocks, it seems reasonable that some prospective investors would turn to borrowing money to fund their investing plans.
But borrowing money to potentially make money is not always a wise decision, especially for the average or novice investor.
Experts that spoke with loans.org concurred that only the wisest, sharpest, and most experienced of investors should borrow personal loans in order to fund an investment.
“Generally speaking, borrowing money to invest is not a solid financial strategy for those who don’t already have the means to make the investment,” said Cecily Welch, CPA. “Borrowing money to invest is a prudent strategy for those who already have the funds, but can get a very low interest rate from a lending institution. Thus using someone else’s money for investments can be profitable and worth the risk associated.”
As with most other forms of debt, investors interested in personal loans are advised to verify that their income (minus living expenses) can cover the monthly payments that will be associated with the amount of money they hope to borrow. Similarly, the estimated interest on any personal loan used for investment purposes should be factored into one’s plans, as that additional cost must be considered when determining an investment’s profitability.
One investment is always on the minds of many Americans: real estate.
In the words of Lex Luthor, “land is the one thing they don’t make anymore,” and as a result, investing in land can be highly valuable and lead to massive profits. The soaring property prices and current frenzy over flipping houses is a testament to real estate’s potential for massive profitability. But such potential profits also makes room for equally large potential losses.
JeFreda Brown, CEO of Brown Accounting Solutions, has a lot of experience working with real estate investors and homebuyers.
She says that investing in real estate should be treated like a business, and that investors should only borrow personal loans to invest in property if they have crafted a business plan. When it comes to flipping, she said that having a solid exit strategy or a plan to rent out the home is absolutely necessary, and it that exit plan should be made before seeking financing.
The Finances of FOREX
One increasingly popular investment is the foreign exchange (FOREX) market, which involves the trading of currencies.
Dean K. W. Withey, Managing Director of Forex Training Worldwide, said that very few new investors borrow person loans in order to purchase currencies.
This is largely due to the difficulty and risk inherent in FOREX trading. New investors tend to either self-fund or borrow small amounts of money from friends and family.
However, experience builds with time and Withey is comfortable with experienced traders that have profitable track records borrowing personal loans to fund their speculative investing.
“I personally have borrowed from financial institutions in order to invest – so have many of my peers,” said Withey. “It comes down to simple math. If my trading can produce X percent per annum and the interest rate and repayments on a loan are less, whatever left over is profit. In trading, the more money one has to invest the more money one can make whilst risking less.”
Experience versus Youth
As Withey inferred, experience breeds success. He isn’t the only investment expert to share that belief.
Mike Scanlin, CEO of Born to Sell, told loans.org that his options trading services company has a customer base that is middle-aged to old-aged.
“My typical customer is 40-70 years old, male, living in the US,” said Scanlin. “The younger ages in that spectrum are more risk-loving, they borrow money and trade on margin, because they are still working full time and can withstand fluctuations in their portfolio. The older ages are generally investing their retirement nest eggs and are risk-averse.”
Scanlin said that so long as borrowing costs are less than the investment’s expected returns, then personal loan borrowers can profit from financing their speculative purchases.
“Maybe you borrow at 3 percent and earn 8 percent. So you make 5 percent on the borrowed money,” he said.
Most experienced stock investors are comfortable borrowing money. Scanlin says they know what they are doing and are able to take on the risk of investing borrowed money. Most of them actually go on to make money using completely borrowed funds.
If everyone were experienced stock investors who could borrow money and expect a profitable return, then no one would ever need to work since everyone would be wealthy. This certainly isn’t the world we live in and experts comprehend that fact.
Even new investors in real estate — the rollercoaster of investments — are cautioned by Brown not to borrow money initially, especially personal loans. She said that new investors are still learning the market and should prioritize planning and working with real estate agents over getting into debt.
Her advice extends to other investments.
“I advised new investors not to borrow money to purchase stocks and other financial instruments because they are ‘new’ investors,” she said. “They’re still learning how to invest. I advise them to be aware of what’s going on around them. There are so many investing scams that happen each year. I wouldn’t want anyone to go and take out a loan to invest into something they don’t know anything about.”
She said that more astute investors recognize what it takes to receive returns on the financial instruments they invest in. And when astute investors are faced with an investment opportunity that must be moved upon quickly, Brown said that sometimes borrowing a personal loan is faster than liquidating other assets to free up cash.
The Perils of Investing
Any would-be personal loan borrower is advised by Scanlin to either “be extremely careful, or don’t do it at all.”
He recommends that personal loan borrowers ensure their investments are highly conservative and that the cash flow is sufficient enough to service the cost of borrowing and still leave room for profit.
“You have to be more conservative when investing borrowed money than you do when investing other money,” he said.
Scanlin frowns on any student loan borrowers thinking of obtaining personal loans in order to enter into investment markets. They should be paying off their student loan debt rather than borrowing to invest.
He certainly is correct in that paying off one debt is hard enough, nevermind two. While not every investment opportunity remains open for the long term, there will always be future investment opportunities for novice investors seeking to make a profit.
It is far better to wait and invest hard-earned money rather than to let over-eagerness take hold and poorly invest borrowed money. Even though fortune may favor the bold, when it comes to investing with personal loans, indebtedness favors the risky.