Personal Loans for Investing Can Be Risky

[Nov 11, 2009.]

 

It may be tempting to use a personal loan to invest in real estate, stocks, or other investments. But investing with borrowed money is very risky, and should be avoided by the average consumer.

Personal Loans are OPM

Business professionals and investors use other people's money (OPM) all the time to make investments or run their companies. Most people buy homes using OPM to finance their purchases. Students also leverage money by borrowing to attend college.

When someone gets a personal loan to invest, he or she is assuming they can earn enough money to pay it back with interest. If that person invests using a brokerage, there will also be transaction and brokerage fees.

Loans Must Be Repaid No Matter What Happens

But what happens when a borrower can't pay back a loan because his investment tanked? Unless that person has enough money saved, he is up a creek without a paddle. If payments aren't made for several months, the lender could turn the account over to a collection agency. Ultimately, wages could be garnisheed or a lawsuit could be file by the lender.

Where to Get Money to Invest

For the average person it makes more sense to pay off debt and build an emergency savings before starting an investment plan—especially in this economy. Once those things are accomplished, he can put money into an account designated for investments. Anyone really looking to get started with investing should consult with an advisor who can help manage the money.

Using a Knowledgeable Advisor

An investor should look for an advisor who takes the time to learn about his unique situation. Cookie-cutter investment plans can do more harm than good, especially for someone just starting out with investing. Also, ask about the fee structure for getting investment help. Some investment advisors get paid a flat fee, some take commissions on sales, and others may use a combination of both.

Long-Term Plan to Build Wealth

Building wealth is a process that takes time. Avoid get-rich-quick schemes and risky ventures such as borrowing a lot of money to invest. Generally, it's wise to avoid taking on debt unless a borrower has a really good reason, such as paying off a higher-interest debt. In many cases, that can be done without a loan. 

People who decide to get personal loans should request quotes from several lenders to find the best deal. Borrowers can begin the search for a loan here.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.