Can you use personal loans for wealth creation? Here are 5 different ways to do it | Mint

Raising a loan is not unusual anymore, particularly for salaried people, in today’s time and age. If you fall short of money while you are planning to go on a vacation or to buy jewellery, you can raise a personal loan.

Additionally, if you need money to repay your current debt, you can borrow a fresh loan, particularly if the new loan is being offered at a lower rate of interest.

It is not common knowledge that one can use the proceeds of a loan to create wealth. Does that sound strange? It is true. However, it requires careful planning and a good understanding of the risks involved.

These are some of the ways through which one can use the loan proceeds to build wealth.

Use loan proceeds for wealth creation

1. By investing in properties: The property prices rise over time, and rental income can provide passive cash flow. If leveraged wisely, the return on the investment can exceed the cost of the loan.

2. Expanding a business: Using a business loan or personal loan to fund a startup or scale an existing business. A successful business can generate significant profits, build equity, and create long-term value.

3. Equity investments: You can use the loan proceeds to invest in equity. And if the returns from investments surpass the loan’s interest rate, you can let your wealth grow. However, one must remember that stock market volatility makes this a strategy riddled with risk.

4. Debt consolidation: By raising a fresh loan at a lower interest rate and retiring your current debts, you can use the proceeds to savings toward investments or other wealth-building activities. This effectively means you can save the money by paying loan at a lower rate of interest when you raise a fresh loan. 

5. Emphasis on re–skilling: Higher income from improved qualifications can help increase savings and investment capacity.

However, one should consider a slew of risks that come with raising a personal loan.

Risks to consider:

1. Debt costs: The interest on the loan may outpace the returns from your investment or venture.

2. Market risks: Investments such as equity and real estate are subject to market volatility and could lose value.

3. Leverage risks: Using borrowed money amplifies both potential gains and losses. Loans require regular payments, which could strain cash flow, particularly if investments are not too liquid.

So, while loan proceeds can serve as a tool for wealth building, the key is to do it strategically and responsibly to make sure the rewards outweigh the risks.

(Note: Taking a loan comes with its own set of risks)