Right and Wrong Way to Use Personal Loan - picture of cash being given to outstretched hand
Personal Loans

The Right (and Wrong) Way to Use a Personal Loan

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Before we get started, let’s get one thing straight: Debt sucks.

In our new book, Zero Down Your Debt (in stores on January 10th, 2017!!!), we describe how debt is the “single biggest obstacle standing between you and your dreams.” It’s true. When you’re in debt, part of every single paycheck is claimed by somebody else. And when you can’t use your full earning power to save, it makes it extremely difficult to get ahead.

There are a gazillion reasons why we get into debt. Perhaps we’re living too close to the edge, stretching our means as far as they will go. Maybe we aren’t doing a good job with our budget, spending more than we earn. Perhaps we aren’t prepared for the inevitable emergency, so every unexpected expense becomes an instant financial crisis.

The thing is, when we are running short on money, desperation starts to set in. And desperate feelings lead to desperate actions. So, what do we do? Too often, we turn to debt to solve our immediate problem, creating even bigger problems for ourselves down the line.

With that being said, there are some ways you can use debt to your advantage. When used correctly, personal loans can be an excellent way to save money on interest payments. By using them in the right way, these short-term loans can help you get ahead for good.

But, beware. Playing with fire can cause some painful burns. Here are a few things to understand before taking out a personal loan.

The Wrong Way to Use a Personal Loan

Let’s imagine you need a new roof but don’t have the money. Or, perhaps your car just broke down and you need to get it repaired. Maybe your daughter needs braces or your son really wants to go on a school trip that costs $3,000. All good reasons to take out a personal loan, right?

BUUUUUUUUZZZZZZZZ!!!!

Wrong.

Taking out a personal loan to cover costs you can’t afford results in a quick ticket to the poor house. Sure, if everything goes as expected, then there might not be any problems. But how often does everything actually go like clockwork?

Using loans to buy things you can’t cover in cash destroys the power of your paycheck. Constantly owing money to somebody else makes it extremely difficult to save money for yourself and get ahead.

In reality, what you’re doing is “living beyond your means.” By using a loan, you’re purchasing things you really can’t afford. What’s worse, you probably don’t even realize how much you’re overspending. Debt delays the pain of payment, making it seem like you’re actually buying less than you really are. That leads to more overspending, more debt, and more struggling.

Of course, there are ways to pay for all of these things. It’s not as sexy as putting it on a card or taking out a personal loan so you can have it right away. But, it can be done.

The way to do it correctly is to budget and save. Plan ahead for these expenditures so you won’t have to use debt. Start an emergency fund for unexpected expenses. Start savings funds for big-ticket items you know are coming – like braces, a roof, and school trips. Slowly but surely, save the money until you have enough to cover your costs. You’ll be far better off over time.

The Right Way to Use a Personal Loan

With that being said, I do think there’s a right way to use personal loans. In my opinion, if you’re already in debt, a personal loan is a good option for helping you to get out. Did I lose you yet? Lemme ‘splain.

If you’re carrying a bunch of high-interest credit card debt, a personal loan can help lower your payments so you can get ahead of the debt. By transferring your balances to a personal loan, you’ll pay less interest, saving you money over time. And, when you pay less in interest, more of your payments go straight toward the principle. That means you can make a huge dent in your overall balance at a much faster pace.

Now, you might be tempted to transfer your balances simply to lower your monthly payments. Don’t. You aren’t doing yourself any favors by lowering your payment but not aggressively attacking your debt. With the extra breathing room, you might even be tempted to charge more crap, leaving you in a worse position than when you started!

If you’re going to use a personal loan to get ahead, make sure you’ve committed to paying off your debt at lightning speed. Use the extra room you’ve created to make extra-large payments toward the loan, destroying your debt with huge chunks at a time. Take all the money you’re saving in interest, add whatever else you can to the payment, and ditch that anchor as fast as you can.

And THAT is how to use a personal loan to your advantage.

Where to Compare Personal Loans

If you’ve made the commitment to destroying your debt, shop around to find the best terms and interest rates. Different companies also have different requirements for approval, so it helps to check out a few.

We found this helpful guide for comparing several personal loan companies in one glance. There are quite a few differences between companies, so it’s worth spending 15 minutes to get it right.

Wrapping Up

Personal loans aren’t the right choice for everybody, but they can help you get ahead if you’re committed to doing it the right way. By transferring high-interest rate debt to a personal loan with a lower rate, you’re giving yourself the opportunity to make major progress toward paying it all off.

Don’t squander your chance to get ahead and fall further behind. Use it to get ahead of your loans and pay off your debt forever.

How do you feel about personal loans? Have you ever used a personal loan to help pay off debt? Let us know in the comments below!

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9 Comments

  1. It is my instinct to always ignore this option. However, you outline a really important reminder that even loans that get a bad name can have a powerful purpose if they’re leveraged effectively. My favorite part about this is the reminder that people (myself included FOR SURE!) tend to act foolishly in regards to money when they’re panicked. It definitely pays to read articles like this in advance!

  2. Completely agreed Greg. I think if you’re using a loan as a tool to help kill your debt faster then it’s definitely something you should look at using. I know there are some that take loans out to finance things they should’ve budgeted for in the first place and, unfortunately, that just furthers the cycle of debt. But, if you’ve got a changed attitude & it helps you save money then I say go for it.

  3. Good thoughts Greg, a personal loan is just a tool in the toolbox and you have to use it properly. And, if you’re going to use one, the absolute best type is a Home Equity Line of Credit (HELOC) if you have one. The interest rates are low, because they are secured by your home, and the interest you do pay is tax-deductible. A double-win!

  4. Yeah so true, We do face financially dark side where we do not know what to do next. Such a situation usually occurs as we tend to spend more without saving any thing in the process.

  5. Hello, I am trying to do debt consolidation, but it seems that the lenders only approve someone with a low debt to ratio. My debt to ratio is high because my credit card balances are high, that is why I am trying to consolidate for a lower monthly payment. It would seem as though the lenders would understand. Are there any lenders that does not require this qualification? Thanks

    1. Yeah, some of these lenders can be pretty strict. If you can consolidate, you might just need to snowball the debt as fast as you can.

  6. My sister was in some credit card debt and was asking me for some advice. I simply said to pay off the highest interest balance first and knock them out from there. But then I thought about the personal loan idea and it worked really well for her. It consolidated her multiple credit card loans into one and made the payment much lower. It worked for her in that situation and honestly it’s something most people in credit card debt should consider.

  7. I got my first personal loan in August to help me with moving costs and I must say I will never get another personal loan again. Like you mentioned, I started spending way more than what was needed and now most of my paychecks are being taken by an awful decision. I decided to use the snowball effect and attack it viciously. I will pay it off completely next month. Good riddance to three months of hell. Shew.

  8. You make a great point that you should shop around for the best terms and interest rates before you decide on a personal loan. I am looking to get a personal loan in the next few months and I will make sure to pay off the loan as quickly as possible because I am committed to paying the loan off! Also, I appreciate that you say to start an emergency fund for the future and I will make sure to do this after I pay off the personal loan!

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