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Should I Take a Personal Loan to Purchase Shares?


Should I Take a Personal Loan to Purchase Shares?

  • By Saral Credit
  • December 08, 2021

When it comes to investment, shares, real estate, mutual funds, and traditional FDs are some of the common names that come to your list. Among all, people are more inclined towards the stock market after a significant growth after COVID-19. High returns are one of the primary reasons behind the increased involvement of people in the stock market.

However, you must know that with high returns comes an increased risk of losing your investment. That's the reason why the stock market is never a newbie's game. Newcomers still look at it as a golden opportunity to put their money and multiply their returns. Unfortunately, not everyone has enough money in their bank to invest in stocks and make massive returns.

That's why many youngsters are considering a personal loan as an option to get a lump sum amount in a go and put the entire amount in buying shares of different companies.

Many of you would ask how worthy it is to invest in the stock market using a personal loan?

When it comes to taking a personal loan for the share market, you must know many pros and cons. So, let's check out each one of them and make your decision accordingly.

High Lump Sum Amount: The foremost need for stock market investing is a lump sum amount that can give you significant returns. For better results in a short period, lump-sum investing is better than SIP (Systematic Investment Plan)

You get a high corpus in a single go with a personal loan. Interestingly, you also get the option to return that corpus to the respective bank/NBFC via monthly EMI.

Tax Benefits: According to India's Income Tax Act, 1961, a personal loan can help you get tax benefits. However, it primarily depends upon how you use it.

You can avail tax benefits under Section 80C of the Income Tax of India. It is advised to consult with a financial expert before you apply for a personal loan and look forward to getting tax benefits.

High Returns to Compensate Loan Interest Rate: Yes, you need to pay an interest rate when taking a personal loan. But if you put in your strenuous efforts and earn returns far more than the personal loan interest rate, you are on a positive end.

Undoubtedly, the consolidated profit will be lesser (Stock Profit - Loan Interest); still, you make money out of your personal loan. Isn't that amazing?

However, it's crucial to know that stock market investing is too risky until you are experienced enough for long-term investing or intraday trading.

So, these are some benefits of taking a personal loan and purchasing shares out of it. It's time to discuss some opposing sides as well. Below are the cons of taking a personal loan for stock market investing.

High-Interest Rates: If you are familiar with all loan types available in India, a personal loan has one of the highest interest rates available. It means you are bound to pay high EMIs even if you are repaying the amount in a shorter period.

If you cannot make a significant return with your shares, you need to cut your expenses to repay the loan EMIs.

Negative Returns in Stock Market: The biggest fear of putting your personal loan amount in the stock market is getting a negative return. Gaining profit from your shares is one aspect of investing (regardless of the percentage). However, based on volatility and investors' sentiments, there are cases when your stock selection works opposite to your expectation and results in negative returns.

You don't even earn your principal amount back in such a case. This is a disastrous situation when you have to pay high loan interest rates and negative principal amount.

So, you are now familiar enough with the ups and downs of personal loan for the stock market. Now, there are some pointers which you should always keep in mind if you have already set your mind.

Personal Loan Rates and Charges

If you are all set for gearing/leveraging, you should know that a personal loan comes with an interest rate that you need to pay every month alongside the principal amount. Moreover, you are also required to pay a small file charge to get your personal loan. Mostly personal loans are offered at high-interest rates compared to other loan options.

Still, if you have a high credit history, you have a high chance of getting a personal loan at significantly lower interest rates. A higher interest rate will increase your monthly EMI, adding a burden to your finances.

Furthermore, the file charges vary from bank to bank, which you must verify before selecting the bank. Some high LTV customers get a personal loan with no file charges. Hence, you can consider taking a personal loan if such an opportunity is available with low-interest rates.

The right thumb rule says that you should always research different personal loan lenders and choose the one with lower interest rates and the least file charges.

Know About Investing:

Without adequate knowledge, the stock market is more like a well of uncertainties where you have a high probability of losing out. Until you find an opportunity to equate or increase your returns (compared to personal loan interest rate), it's never a good idea to proceed further.

Investing a personal loan in the stock market has ups and downs. However, it will take you downwards more often if you lack the right investment skills.

So, before you get a personal loan and put the entire sum in buying shares, it's always advised to grab sound investment knowledge.

Check Your Risk Appetite: Risk appetite is your level of taking risks or losing out. Not everyone has the potential to lose an entire investment amount. So, you should know what's the best loss percentage you can lose in the stock market.

Multiple factors affect the risk appetite, including your age, income, and the level of responsibility you own. A mature and 40+ investor will never consider taking a personal loan for the stock market investing.

You should also understand the share market and check whether you can generate desired profit from them or not.

Check Repayment Options: It's always good to make profits regularly to ensure you pay for your loan amount simultaneously, earning money from shares. However, some financial experts may suggest you hold the stocks for long. In such a case, you should have enough funds to continue repaying the mount without facing a financial crisis.

The best way to take control of this is to evaluate your funds and manage them before you take a personal loan and put your money in the stock market.

Check Your Investment Performance: Well, if you are planning to take a personal loan to buy shares, it's obvious that you have selected a few companies as well. What's important here is to track the investments before you put your money in.

Check various stock market parameters like PE ratio, Dividend Yield, Book Value, Promoter's holdings, and other past essentials that give you a clear picture of the investment.

Once you are sure enough about the quality of the share and have strong predictions about its success, you can go ahead without a second thought. Remember, it's tough to predict a sound return without a practical stock analysis. Hence you should put your time analyzing every aspect of the stock before you take a loan and start investing.

Calculate All Expenses: When you take a personal loan, you only consider the principal and interest repayment. Instead, many other costs are involved, like file charges, service charges, etc. You should ask the lender about additional associated charges (including hidden fees) before finalizing the loan amount and proceeding with the documentation process.

On the other hand, you will require a Demat account when investing in the stock market. Hence you will be charged a one-time fee to open a Demat account. Moreover, brokerage charges are also associated with the shares you purchase. Thus, you should have a rough estimation of the different expenses associated with the personal loan and share market.

Additional TIP: When applying for a personal loan, you should not reach numerous lenders at once. The reason is, they always check your credit score to evaluate your repayment potential and credit history. Multiple requests for credit score (all at once) impact your score, which will affect you in the future.

So, prefer researching online and making selective queries when you are set to take a personal loan and start your share market journey.

Remember, the stock market is only for people with a high-risk appetite to get high returns, but a lack of knowledge and expertise can significantly drain your investment.

Disclaimer: You should always think twice before applying for a personal loan if you plan to put the entire sum in the stock market. Moreover, you should never follow any tips and invest your sum blindfolded.

So, what are you waiting for? Make your mind and choose the right decision based on your risk appetite.

Important NOTE: According to the RBI Guidelines, lenders only approve the funds/loan amount for non-speculative purposes. Even if you made a self-declaration mentioning a non-speculative purpose and using the sum for the share market, such borrowing isn't allowed.