You are contemplating leverage
In finance, leverage is borrowing money for investment, with the expectation (goal) of gaining higher gains than the cost of borrowing so that you end up with a net profit. This is the same principle behind margin accounts, where money is borrowed to hold an equity position you don't have the cash to cover on your own. It is indeed even the same idea as buying a house with money you've borrowed from the bank. It also follows all normal loan rules, including regular interest payment, requirements to pay back the principle on a set date, or margin calls (in the case of margin trading, but that doesn't apply to a personal loan as examined here).
Leverage multiplies both gains and losses
When you succeed in your investment, leverage multiplies your gain. Lets say you start with $100, and you invest without leverage on an investment that gets you 5% return in a year. At the end of year 1, you thus have $105.
Alternatively, you decide to take your $100 in addition to $1000 you borrow at 1% interest. You still get 5% return on all invested money. At the end of year 1 your $1100 invested returns you $55, less a cost of $10 in interest, for a net gain of $45. On your cash investment of $100, it is as if you had been investing at a 45% rate of return!
So leverage is great, right? Well, sure, when you win - but what if your investment was down 5% instead of up?
Unfortunately, when you lose you still have to pay back the money with interest. So you invest $1100, you are down 5% on top of having to pay 1% in interest, and you end up with a value of $1035 at the end of year 1 - a loss of $65, leaving you with $35 of your own money, a 65% loss. Ouch! And all that for just a 5% loss in what you invested in?
Leverage Means Risk of Not Having the Money to Pay Off the Loan
The higher the leverage you use, and the higher the potential downside on the investment (and the market can certainly go down more than 5%), the higher the chance that at the end of the loan period you will have less investment money than the total on the loan. This means that not only can your investments wipe out your at-risk capital, but they can put in you debt as you lose more than invested. You will then continue to pay penalty and interest money, as well as likely a hit to your credit, as you shovel money that would have gone into your savings/investment to cover the money you borrowed.
As an example, in the above example if the market had gone down 10% the $1100 invested would have become $990, less $10 in interest, meaning you end up at -$20. That's a total loss of the $100 you invested, plus you have to pull from savings just to cover paying back the loan. And if you don't have it - even worse, as more interest and penalties will add up.
Leverage increases risk of ruin and maximum drawdown
Overall, leverage means you have a greater risk of ruin (losing all you invested or more), and increases the maximum drawdown your investment strategy can experience relative to your own capital.
If you "pay" these risks, you get magnified returns.
If you only consider upside potential in investments, you will end up bankrupt. You have to decide your own personal appetite for risk, including your ability and willingness to handle ruin (not being able to cover interest or pay back the principal on time, bankruptcy and beyond). Leverage is a magnifier and increases risk, while offering the potential - but not the guarantee - of magnified gain.
