Is it wise to take a personal loan to invest? Here’s what you need to know

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With booming stock markets and investment sites making it easier than ever to invest in mutual funds, stocks, or cryptos, some people are tempted to finance investments with personal loans. The idea is simple: borrow money at some rate of interest and make more on your investment. On paper, the argument makes sense—especially if you're an optimist when it comes to market performance. But in reality, it's a risky financial bet that could be a disaster.

Personal loans carry steep interest and no collateral

Most personal loans in India are charged between 10% and 24% per year as interest rates. Which means that your money needs to earn more than that just to recover. Sure, equity markets have delivered average returns of 12–15% on a long-term basis. But those returns are never guaranteed. A poor year or a poor stock pick can deliver you negative returns—while you go on paying your EMI on your loan every month.

Market volatility can derail your repayment plans

Even if you have invested in a blue-chip mutual fund or index, market fluctuations can make your paper profits useless in a matter of seconds. If short-term returns are what you rely upon to pay back your loan, a downturn could put you in financial trouble. And if you default on EMIs, your credit score is hit, and it gets more expensive—or becomes impossible—to borrow later on. Personal loans, unlike secured loans, are not collateralized, so lenders charge heavier penalties when you default on the payments.

No tax subsidies or safety net

Borrowing to invest doesn't have any tax advantage. In fact, interest on personal investment loans is not tax-deductible. Also, personal loans offer no asset protection—like a home loan where the asset is of long-term value. If your investment goes wrong, you're in debt and with no security. This adds to the financial stresses and can wreck other long-term financial goals like retirement savings or buying a home.

When it might make sense—but only for seasoned investors

Occasionally, seasoned investors who really know the market might engage in calculated risk with borrowed money—particularly during stock market crashes when prices are low. But even so, they normally employ margin trading or secured credit, not high-interest personal loans. For the general retail investor, borrowing a personal loan to invest is more luck than strategy.

Smarter to invest what you have

Personal loans are meant for short-term emergencies or necessary expenses—not for speculative investment. If you really want to build wealth, it is better to invest from savings, increase your SIPs, or build a diversified portfolio in the long run. Following the market returns with borrowed funds can fetch you more debt than returns. Most likely, the risk is far higher than the return.