Investing in stocks using loans: learn the basics!

Loan sitting on hand showing ways to use loans to invest in to stocks

Obviously, when investing, you should only use money that you can afford to use and potentially lose.  This means that generally speaking, it is better to invest in smaller portions or to save until you have the capital available to invest from a stable start position. Despite this, there are some ways to acquire capital with which to invest that may provide the essential stepping stone for first-time investors. Sometimes, investing in stocks using loans can be a great way to get started.

There are a variety of loans available that can cover a wide range of needs and budgets. They also vary based on payback time and interest. The main types of loan to consider are overdrafts, credit cards, personal loans, peer to peer lending, and margin accounts. Some of these are more traditional sources of money and come from large institutions, whilst others are more informal and can be between family and friends. Depending on where you choose to loan money from, this can be a more or less risky venture.

Trading in stocks and other investment options are not going to create a guaranteed income, and may even result in financial losses. This is something you must carefully consider before loaning money. You must have the means to pay back the loan if your investment is unsuccessful, whether this is in a one-off payment to your loan provider, or instalments to make the payback more manageable. Keep reading to find out what I think about the different types of loan you can use to invest with!

SUMMARY TABLE

TYPE OF LOANTYPICAL INTEREST RATESPAYMENTSWHO CAN ACCESS IT?
Overdraft (Arranged or Unarranged)0% – 39.9%WheneverAlmost anyone
Credit Card10% – 39.9%MonthlyGood Credit history required
Loan – Bank3.8 – 39.9%MonthlyGood Credit history required
Loan – Shark20% – 2356%One PaymentAlmost anyone (Illegal!)
Loan – Student5.4%Automatically deducted from wages once minimum earning threshold is reachedStudents
Peer to Peer Lending6% – 39.9%Organised individuallyAlmost anyone
Margin Account8.3%When stock increases in value/ one paymentSophisticated traders only
A summary table of loan options.

OVERDRAFTS

An overdraft can be defined as your bank account going into the negative territory where you owe the bank money. An overdraft is arranged with your bank in order to agree on how much more money you can withdraw than what you have available. This can vary from a few hundred pounds to several thousand depending on your financial background and your income.

For students, overdrafts are often interest-free, meaning that they are a good source of income. As long as you have the means to replace the money should it be lost, an overdraft can be a good place to start for students. A student may choose to use their overdraft and then pay it back to themselves over the course of their degree so as not to incur overdraft interest fees.

overdrafts are one method of investing in stocks using loans

Interest rates on overdrafts can be as high as 39.9% in the UK. This is quite high, as it is an unarranged loan from the bank, and therefore the bank has little to no guarantee that they will get their money back. There is an even higher interest on unarranged overdrafts; if you wish to use an overdraft, then it is better to arrange this with your bank and stay well within your limit to minimise fees. One of the benefits of using an overdraft is that there is no set instalments or payback schedule, although interest is applied periodically if you do not pay money in to get your account in a positive balance.

CREDIT CARDS

A credit card is the same as a normal debit card, except you are spending money that has been lent to you by the bank (or other credit card provider). Like an overdraft, these come in a variety of ‘limits’ depending on your financial history, from around £250 to near unlimited cards for the super-rich. Credit cards are then paid back in monthly instalments, although larger chunks can also be paid off if available. There is normally a monthly minimum payment dictated in the contract in order to ensure the credit company gets paid back, and extra charges are applied if these payments are not made. The interest on credit cards can vary depending on the provider, limit, and type of card. Typically, interest on credit cards falls between 10% and 39.9%.

 Like an overdraft, a credit card is a good way to spread the cost of a loan. Credit cards, however, have minimum monthly payments to meet, and to be approved for a reasonably sized credit limit you must have a fairly successful financial history and good credit score. Therefore, a credit card may be a good place to start if you are investing in stocks using loans, provided that you approved by a credit company.

PERSONAL LOANS

A personal loan is a loan made by any lender (often the bank) that is not secured against your assets (like your house or car). You agree how long you would like to take to pay the loan back, in fixed monthly instalment with a fixed interest. In most cases, you can also pay the loan off early. Which! compared different lenders based on a £5000 loan on a three-year term, with the cheapest interest rates all being under 4%. These cheaper-interest options did, however, have an early payment charge.

When taking out a personal loan, it is important to avoid ‘loan sharks’ and payday loan companies such as Quick Quid. These are independent companies that charge huge interest fees, for a similar sum, in order to make as much money as possible from those looking for loans. The only positive of these payday loan firms is that they are far easier and faster to be approved on, although this does not balance the huge cost of using them. Investing is not a financial emergency, and so can wait for a bank loan or other more traditional loan with a lower APR.

For students, student loans may be a good place to start when investing in stocks using loans. Provided that you can cover your rent and living costs from your maintenance loan, it may be wise to put aside some of your loan for investing. You don’t repay this money until you have a high enough income, and is charged at just 5.4% interest. As a student, you are uniquely positioned to make the most of your youth in order to build financial stability for the rest of your life! To read how I made my student loan work for me in the investing world, click here (LINK HERE). If you can’t cover your day-to-day costs with your maintenance loan, I obviously do not recommend this move, although if you have a little spare cash then your student loan may make a great first step onto the investing ladder!

PEER TO PEER LENDING

Peer to peer lending (sometimes abbreviated to P2P) is a new phenomenon born of the internet age. Developed in 2005, there are now several platforms linking those who need loans and those who are willing to loan their money in order to make more interest than they would in a traditional savings account. This removes the middle step of the bank or a more traditional lender. The platforms themselves set the terms and rates, and then facilitate the trade. Upstart is one of the most well-known of these ‘social lending’ platforms and charges an interest rate varying between 6% to 39.9%. This is based on financial history and credit. For users with good credit, this is as low as bank loans without the hassle of having to get approved. Obviously, these sites may also add their own fees and charges in order to make a profit.

This may be a solid option for people without a strong credit history (or any credit history at all).

MARGIN ACCOUNTS

A margin account is a style of brokering account whereby you borrow money directly from the broker in order to trade and invest. This means that, if a particular asset increases drastically in price, then the broker is automatically paid back and you still get more profit than if you had just invested with your own funds. If the asset experiences losses, you must either deposit cash or sell some of your other assets to the brokers in order to offset the margin.

This means that it is possible to lose more money than you initially invested, and means that this style of loan is unsuitable for novice traders. When you are investing in stocks using loans, this may be an option to consider once you have learned the ropes.

CONCLUSION

There is a wide range of borrowing services available to investors who need an extra bit of funding. if you are investing in stocks using loans, you have a wide range of options available to you. Some are less formal, such as credit cards and overdrafts, which allow you to borrow money more at your own rate and pay it back more informally too, although this incurs extra charges and interest. There are also more traditional methods, in the form of personal loans either from the bank or on peer-to-peer loan sites. To borrow directly from the trader, there is also the option for margin accounts.

It goes without saying that you should not invest with money that you already have. Unless you know that you can pay back what you owe even if you lose out on investing, it is best to avoid borrowing to invest. If you do invest with borrowed capital, you may wish to use a more cautious trading method to decrease risk, as with the passive trading system. By holding a position for a long time, traders can maximise their profits without the high risk of buying and selling assets based on market fluctuations, however it is important to note that you can get into serious financial trouble borrowing money to invest and in some cases the stress can be too much.

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