Is it safe to take out a loan to invest and what are the other options

If you take into account the opinion of experts, the answer that you will get is a “No”. This is because generally speaking, you will not come across banks that will extend loan to you to invest in stocks.

There is an exception, although it does not make sense under general circumstances, the only instance when you can opt for a loan to invest in stock trading is “Invest a loan”. This is a condition in which the ROI or the Return on Investment of the loan is higher and the risk involved in the investment is usually not so high.

As such, you can refrain from investing a loan in trading stocks or other vehicles of investments and derivatives. Let us delve deeper into the topic for better insight.

There is another reason why it does not make sense in investing loan in stocks especially if your proceeds of the loan mature when the loan is due. You can take the risk provided you make sure that ROI is more than the loan cost.

Other avenues to explore

If it is not the option above there are many other avenues that you can turn to for better ROI. If you are borrowing money for investment purpose, it is often called “leverage”. These options have been discussed in the paragraphs that follow-

  • Line of credit

You can explore this option and the rate of interest it attracts will essentially depend on the amount you borrow, whether or not you are using collateral, the type of loan you are opting for, your credit score, and the term of the loan.

  • Make use of home equity

You can apply for a new mortgage or for that matter refinance an existing mortgage. One advantage of this type of loan is that not only is the cost of the loan covered but you also get to enjoy an extra income. However, taking out a mortgage essentially means that your collateral might get forfeited if you are not able to pay off the mortgage.

  • Stock Short sell

If you are short selling stocks, it means that you are borrowing shares from the investment company since you are apprehending that the cost of the stocks might plummet. There is a downside to it too and that is in the event the price of stock rises, you could lose out on the money that you had invested in stocks. Under such circumstances, short selling stock will be a choice that will work against you. If you want to know more about other avenues that you can explore, learn more from here.

How to select your options for availing loans?

Regardless of the type of loan you are opting for, there are few aspects that you must take into account. These include the following-

  • Rate of interest

The interest rate will determine the cost of your loan. The higher the interest rate, greater is the cost you have to incur to borrow.

  • Debt accounts

Are you making repayments for other debt accounts? And if you are having other debt accounts, what is the rate of interest these accounts attract. For your convenience, you will repay that debt account that attracts the highest rate of interest.

  • Repayment capacity

The most important aspect that you have to keep in mind is whether you will be able to pay off the loan religiously within the stipulated time period. As such, if you are already paying back other debts, it does not make sense in applying for another loan thereby adding to your financial commitments and woes.

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