Should You Take Out a Personal Loan to Invest?
by Maurie Backman | Published on Sept. 17, 2021
A personal loan can help you pay off debt or swing a large expense. But should you borrow money so you can invest it?
You'll often hear that investing your money is a great way to grow wealth and meet your financial goals. But what if you want to open a brokerage account but you're short on cash? You may be thinking of borrowing money via a personal loan and using it to buy stocks or cryptocurrency.
A personal loan lets you borrow money for any reason, so once you have that money in your pocket, you can use it as you please. But is taking out a personal loan and investing that money a good idea? It may not be.
Know the risks
The interest rate for a personal loan will vary based on the specific lender you use and how strong an applicant you are. If you have a very high credit score when you apply for a personal loan, you might snag a competitive interest rate on the sum you borrow. And in that case, you may be able to invest that money and generate a higher return on it than the amount of interest you're charged. If so, you'd come out ahead financially.
For example, with good credit, you might qualify for a personal loan at 6% interest. If you invest your money in a way that delivers a 10% return, you'll earn more money than what you're being charged in interest on the loan.
But while the potential to come out ahead in that situation exists, for the most part, taking out a personal loan to start investing isn't a great idea. Unless you really know what you're doing on the investment front, you may not generate high enough returns in your brokerage account to make up for the interest you have to pay on a personal loan.
In fact, even if you are a seasoned investor who's been buying stocks for years, there's no guarantee your portfolio will deliver high enough returns to surpass the interest rate you're paying on a personal loan. The stock market could have a bumpy year, or a handful of the stocks you buy could underperform. If you take out a personal loan at 6% but only manage a 5% return in your portfolio, you'll end up losing money.
What's more, if you're thinking of taking out a personal loan to buy cryptocurrency, you should know that that's pretty risky. The value of cryptocurrency can fluctuate wildly from week to week, and even from day to day. So if you're going to invest in digital coins, a better bet is to use money you already have -- not money you have to borrow and pay interest on.
Personal loans are very flexible, and some charge pretty low interest rates. But remember, a personal loan is still a loan, and you'll have to pay it back no matter what you use that money for. If you invest your personal loan and lose money in the process, you'll still be on the hook for that loan balance. So as a general rule, it's not a great idea to borrow money to invest with. Instead, work on cutting back on some spending or boosting your income with a side hustle. Then you can use that cash to start building an investment portfolio.
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