Definition of loan principal protection

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In-depth knowledge of loan principal protection for specialist investment

It can be a very risky business decision to take out a loan so as to invest in stocks or managed funds. In the event that the stock market does not perform well and the value reduces, you may be forced to pay back the loan from your personal savings.

You can curb this risk by taking out a loan that has insurance on the principal amount. The major benefit with this kind of a loan is that you have the assurance that in case the managed funds or stock investments drop in value, you will continue to pay the interest on the loan but you will not be expected to pay a certain percentage of the loan, usually 100% from your own personal savings. This comes in handy especially when the capital markets become unstable and have dropped in value in the process of you repaying back your loan.

There are also other advantages that come with loans that have loans principal protection as compared to other investment loans, like management of cash flow. For instance, an individual who has taken out a margin loan may be facing the risk of satisfying a margin call in the event that the investment diminishes in value throughout the duration of repaying the loan while on the other hand, an individual with a loan principal protection benefit on their loan will not face such a risk and are in a position to use their savings to invest in other avenues other than the stocks market or expand their portfolio to other sectors in the economy.

Most of the loans that have the benefit of loan principal protection are limited resource loans in that any principal money that you are expected to pay is limited to the actual investment assets and the profits that you make out of the investment. This does not compare to the full recourse loans where your repayment of the loan is unlimited.

Your financial advisor should give you more details

Loan principal protection is not an automatic aspect in loans applications and differ one from another. There are some loans that will offer principal protection at 100% of the entire loan while some will offer a certain percentage of the loan. There are others that will have the principal protection throughout the duration of the loan and others will have the loan principal protection upon maturity of the loan.

Important to note is that loans with loan principal protection are charged a higher interest rate that the common loans. This is because of the benefits that the investor enjoys that are not provided in the traditional loans. It is important to have a comprehensive discussion with your financial advisor before making an investment commitment in relation to loans with loan principal protection. Find out as much as you can from your advisor about the associated risks of such a decision and see if it makes any economic sense for you.

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