Can I Use a Personal Loan to Invest in Real Estate?

Whether we are talking about investing in the stock market or real estate, you need to think twice before making your final decisions because this is a huge financial responsibility. Taking out a personal loan for any of these options depends on how good your credit score is and what type of backing you have. And by that, we mean any information, which might guarantee a return. We all know that there are no 100% guarantees in investments.

Let’s cut to the chase and talk about whether lightning fast loans are suitable for investments or not:

Investing in the Stock Market

The stock market is pretty volatile. One minute, a stock you bought is doing pretty well, and the next minute, it has tanked.

Most people refrain from investing in the stock market with loan money because a personal loan has high interest rates. Let’s say you get a personal loan at an 11.99% interest rate. This loan will only prove helpful to you when your returns exceed the 11.99% cost. A 13% return will also not mean much when you factor in the origination fee.

The same investment will make sense if you make it through a different platform. Let’s look at another scenario where your company offers employees the opportunity to invest in a project they have been managing for quite some time. You have seen the numbers and know that by investing at least $10,000, you will get a return of $20,000.

Here’s a detailed example to help you understand this:

You take out a personal loan of $10,000 with a repayment period of 5 years. The loan has no origination fee, so you get the entire amount upfront. The APR on the loan is 11.99%. After a few days, your investment reaches a breakout period, and you get a 15% return annually.

You then realise that the interest is not tax-deductible, which means you will have to pay tax on your gains. This reduces your profit margin. Even if your investment was not tax-deductible, you would earn 3.01% between the return and APR. Don’t forget the monthly payments for which you will need immediate cash. If you can’t make them, you will have to dip into your investment, reducing the returns.

Investing in Real Estate Crowdfunding

Investing solo in a real estate project is not possible because personal loans are capped at $15,000 to $50,000. However, you can buy shares and with other investors and receive equal returns or higher based on how much you are investing.

Could it be this simple?

Well, yes and no! Allow us to clear the confusion:

Using a personal loan to invest in real estate makes sense when:

  • You don’t have a savings account
  • A shift in the housing market offers a buying opportunity, which you can capitalise on
  • The interest rate on the loan is low, and the return potential is high
  • You can easily make the monthly payments

When Should You Get a Personal Loan?

How’s your credit score? Take a look at the following ranges to see which one you fall under:

Credit Score Range Equifax illion Experian
Excellent 833 – 1200 800 – 1000 800 – 1000
Very Good 726 – 832 700 – 799 700 – 799
Average 622 – 725 625 – 699 625 – 699
Fair 510 – 621 550 – 624 550 – 624
Poor 0 – 509 0 – 549 0 – 549

If you have an ‘Average’ credit score, which is referred to as a good credit score, you are most likely to get low interest rates. This matters because while you will be getting regular returns on your investment, you will have to use some of it to make the monthly payments.

Some lightning-fast loans don’t have strict requirements. The lender might let you pay off the loan early without a prepayment penalty. If the return on your investment is high one year, you can do this easily and save more.

No matter what type of investment you choose, be confident about the return. If you feel that the investment won’t prove to be successful, sell your shares immediately. This might be the case with stocks, but you will seldom face this problem in real estate, as the loss and profit will be shared according to your stake in the project. Always ask the lender if there are any additional charges involved because a single missed payment can wipe out all your returns.

This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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