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Personal Loans

3 Ways to Get Ahead Using Personal Loans

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Here at Club Thrifty, we want you to get out of debt…and fast! Debt is the biggest obstacle standing between you and the life of your dreams. Take us, for instance. Once we finally destroyed our debt, we’ve been able to quit our jobs, work for ourselves, and travel the world – all in the span of less than 5 years.

Of course, we know it’s not possible for everybody to give their two weeks and jump ship. Getting out of debt isn’t a magic elixir for doing nothing the rest of your life. But, it does give you the freedom to do more of the things you want to do.

It might surprise you, then, to read that we think personal loans can be used to your advantage. I mean, are the people who rail against the evils of debt actually promoting loans as a way to get ahead?

Yep, we sure are.

You see, we also think it’s important to make the system work for you. And, if you use a personal loan wisely, it can actually help you to get out of debt faster. Don’t believe us? Let’s take a look!

When You Should Not Use a Personal Loan

The problem with personal loans is that people typically use them when they get into financial trouble. They apply for a personal loan and use it as a stop-gap measure to pay their bills. That’s bad news, my friend. Very bad news.

If you’re going to use debt, and you need to be very careful if you do, you should only use to help you get ahead. When you use a personal loan to get you through tough financial times, you’re not getting ahead. You’ve now got another bill to pay, so you’re falling further behind.

We don’t want that, and neither do you. That’s why using a personal loan for emergencies is a bad idea. Instead, you should be consciously working on building an emergency fund for these exact situations.

Every month, squirrel away at least 10% of your paycheck until you’ve accumulated no less than $1,000 in your emergency fund. This will help you handle any bad breaks or unexpected costs while you pay off the rest of your debt. Once all your debt is gone, you should keep a fully stocked emergency fund of 3-12 months of expenses. Yeah, that’s a big range, but the amount you need is dependent upon your own specific circumstances and ideas of comfort.

3 Ways to Use a Personal Loan to Get Ahead

Now that you know what not to do, let’s look at some ways you can use a personal loan to your advantage.

Pay Off Credit Card Debt

One of the best ways to use a personal loan is to pay off high interest credit card debt. Why pay 12.99% APR or more on your credit card debt when you can move it to a personal loan at 6.0%?

Here’s an example:

Let’s assume you have $2,500 in credit card debt at 12.99% (which is pretty good, BTW). You know that if you make the minimum monthly payment of $25, you’ll never pay it off. So, you decide to pay $35/month instead. That means you’ll have your credit card paid-off in 11.5 years, and you’ll pay a total of $2,323 in interest. (Yikes!)

However, if you move that balance to a 5-year personal loan at a 6.0% rate, you’re monthly payment will increase to about $48. However, you’ll only pay $400 total in interest. That’s a savings of $1,923 in interest AND 6.5 years on the loan.

Even if you raised your monthly credit card payment to $48/month, you’ll still save $785 in interest and over 1 year on your payments – and that’s if you only pay the minimums! So, if you can get a better rate – and you almost certainly can – it makes a lot of sense to move your credit card debt to a personal loan. Just be sure that you pay off the personal loan and don’t run up any additional credit card debt. That’s going to destroy any savings you just earned!

Pay Off Other Debts

Have an auto or motorcycle loan stuck at a high interest rate? Did you finance furniture or appliances that you have yet to pay off? The same principles as above apply here as well. Move your high interest rate debts to a lower interest rate, and pay them off as quickly as you can. Save that skrilla and don’t take out any more loans.

See also: Should I Refinance My Student Loans?

Start a New Side Gig

There are only two reasons I would ever suggest that it’s OK to go into more debt: Buying a house and starting a business. You’re probably can’t secure a personal loan large enough to buy a house, but you can borrow money to help you get a small business off the ground.

We think starting a profitable side gig is a great way to make extra money and get your finances on the right track. But, sometimes it takes money to make money. If you don’t have the cash to buy the equipment you need, a personal loan may be a great option for you. Use a small loan to get up and running, then hustle your buns off to make some sales. Pay off the loan ASAP, and who knows? You might be able to turn your side gig into a profitable full-time venture!

Where to Apply for Personal Loans

There are literally thousands of places that provide personal loans, so how do you know where to start looking? In the past, the best place to start was at your local bank. These days, you’re more likely to find the best personal loan rates through an online lender. Even so, most lenders still use a credit score to determine your creditworthiness and rates.

But, what if your credit score is less than perfect? There’s a solution to that too. One of our favorite online lenders – SoFi – recently announced that they are no longer using FICO scores in their loan qualification process! Instead, they look at your employment history, payment history, and your income to expense ratio to make a decision on your loan application. I’ve never liked credit scores, and I think SoFi’s new system seems like a much better way to determine creditworthiness.

Additionally, SoFi has great personal loan rates! They have 2 to 7-year loans available with fixed rates starting at 5.99% APR* when you choose the “AutoPay” option. You can borrow anywhere from $5,000 to $100,000 (minimum $10,000 for California residents), so you should be able to find a size to fit your needs. SoFi Personal Loans also come with “Employment Protection” and no origination fees or prepayment penalties.

To see if SoFi Personal Loans are right for you, you can apply through our affiliate link by clicking here.

Wrapping Up

Using debt to get ahead is always a risky proposition. However, if you use a personal loan wisely, pay it off, and don’t accumulate more debt, it can be just the kick-start you need to get your finances pointed in the right direction.

*SoFi Disclaimers

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17 Comments

  1. Yea just don’t go to a payday loan business to get ahead. My bf’s friend went to a payday loan center and ended up in this weirdo payday loan cycle where it took him forever to get out of. I think payday loans are from the devil. Payday loans need to go back to the hell from where they were spawned. lol. =)

    1. P.S. I know you didn’t suggest them but I’ve known several people that have gone to payday loan centers. It’s pretty sad. A personal loan is way better than taking on a payday loan.

    2. Oh my. Absolutely!!! No payday loans!!!!!! They are a MUCH different animal.

  2. I think the biggest thing with personal loans is being really financially smart and savvy with them. For example, I have a friend and she and her husband have no debt, so they took out a personal loan to re-do their kitchen. In this case, it made sense because they’re going to repay it quickly and fully understand the value of being debt free. However, this wouldn’t be the case for someone with massive student loan debt, for example.

  3. I think if you know what you’re doing personal loans can be a great option – whether it be to pay off higher interest debt or start a business – though the key is knowing it’s not something you should come to depend or rely on. But, if you can use leverage to get to where you need to me then it can be a good idea.

  4. It always makes sense to me to use other people’s money. I use credit cards responsibly.
    Many people have problems managing credit. That is when the problems arise.

    As long as you do not use credit like your bank account there should be no problems.

  5. So many small businesses don’t make it. If there is anyway to start one without taking out a personal loan I’d go that route first. Better to build it slowly than dive right in with a big personal loan only to see it fail.

    1. I second that and was reading an article just this weekend about how many small businesses fail. I think we sometimes see people who went out on their own and are killing it and forget about all the ones who don’t make a go of their business. I’d try staying out of debt until you at least know your business is going to be profitable. As far as paying off high interest debt, borrowing at a lower rate is a great way to get ahead as long as you don’t use the lower payment as a ticket to run up other debts.

      1. Hey, IMO, any time you can use cash to get started over debt you’re better off. As Holly said, it depends on the type of business though.

    2. It obviously depends on the type of business you start. Starting something online may be cheap or almost free, but a business with inventory or a storefront needs capital. I agree with you, though. I wouldn’t borrow money unless I was certain I could make it work! But then again, there are times you have to take a risk in life. If no one ever borrowed money to start a business, there would be very few businesses in existence. That’s just the way things work, unfortunately.

  6. Using a personal loan can be one good way to build or improve your credit rating–but only if you actually need to borrow money anyway & will be sure to pay if off responsibly & as quickly as possible. I’ve used mine to make down payments on rental properties when I know the rent will cover the payment on the line of credit. When I’ve sold the rental property, I then of course pay off the line of credit immediately. Doing this has helped me get mortgages on rental properties down-the-road more easily too.

  7. I’ve seen so many “experts” say that debt consolidation doesn’t work. Of course it does…if a person has $15,000 in consumer debt across 5 accounts at 18% interest that will take 30 years to pay off if I only make the minimum payment, it absolutely makes sense to get a personal loan at half the interest rate that forces me to make a payment every month that will eliminate the debt in 5 (or less) years. What about that doesn’t work? What they should say is “debt consolidation is only part of the solution.” People need to address their spending habits in parallel with any debt repayment solution.

  8. I am a big fan of using personal loans to consolidate and pay off credit card debt. I recently met with new clients who had over $20,000 in credit card debt and they were paying an average of 16%. I suggested that they look into a personal loan through SoFi to consolidate and they ended up getting one for less than 5%.

  9. I\’m not in favor of delaying debt repayment endeavors either but I do know some people have managed to make a profit on their debt by investing some of it in the stock market. The return they got was more than enough to pay back the loan and add to their overall net worth. So sometimes, if you do your homework and invest in the right shares, you could actually come out as a winner. That is rare, I feel, because market forces would end up eliminating this kind of profit from the system – that\’s just how the free market economy works in a state of perfect competition.

  10. I remember the time when I had a personal loan. I used it to put up a small business. I am glad that I did because that business grew. I never had a personal loan just to buy some wants. The next time I have one I’d make sure that it’s for something greater.

  11. I second Travis’ comment. Personal loans for debt consolidation absolutely can work – IF the debtor is committed to not using credit to live anymore. Love your advice about building up an e-fund too. We can’t put 10% away yet, but we do put away some money every single month, and it adds up quickly!

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