Taking a loan to fuel your stock market dream? Know this!

One of the main attractions that lures in those who take a personal loan to enter the stock markets are the promising, potentially high returns. To enter the stock market by taking a personal loan, look at high returns as a technique of earning higher returns from investment by using the loan amount is called leverage investing. Engaging in leveraged investing is like wielding a double-edged sword. On one hand it gives opportunities for high returns, on the other hand there is also a possibility of huge losses.

When you borrow and invest in shares, you have to repay the loan regularly through monthly EMI. The interest rates on personal loans of big banks range from 11 to 24 percent. According to bank websites, State Bank i.e. SBI is offering personal loans at the rate of 11.15 to 14.30 percent, Bank of Baroda at 11.40 to 18.75 percent, private sector HDFC Bank at 10.75 to 24 percent and ICICI Bank at the rate of 10.80 to 16.15 percent.

Suppose you take a personal loan of Rs 3 lakh at 12% interest for 2 years to invest in the share market, then your EMI will be Rs 14,122. Your financial burden increases significantly with the start of EMI.

Investing in the stock market is full of risk. No one can say with certainty how much return will be received from shares. It all depends on the movement of the stock market. If you take a loan and invest in the stock market and the returns come exactly as per your expectations, then you can earn enough profit to pay the interest on the loan. If the profit from investment comes around 12 percent then you will be able to pay only EMI. This means you will be in a no profit & no loss condition.

One can earn returns equal to the interest rate of the loan i.e. 12 percent or more from the stock market. But there is no guarantee that you will be able to earn more than 12 percent returns for sure. If the investment made by taking a loan falls short of the return required to cover the interest amount, you will incur loss. If this loss increases further and your capital gets eroded and then it may become more difficult. There is also a strong possibility of losing money in the stock market, especially in the short term.

It will be most difficult when there is no return on investment and you are not able to pay the EMI of the loan. If you default on the EMI, the bank will impose a penalty on you. Also, if you do not pay the installments, the interest amount will increase. This will burden you with debt, which will be very difficult to get out of.

Not only this, missing loan EMI or defaulting affects your credit score. This will create difficulty in taking home, car or personal loan in future.

In order to earn quick profits, never invest by taking a loan in the stock market or in any dubious scheme that makes you rich overnight. There is no guarantee of returns or profits in it. On top of that, the risk is very high. That’s why invest only that much money in the stock market that you can afford to lose.