Personal Loans Aren’t Always Bad Debt 54 Comments
On other finance blogs I often hear people talk about personal loans as some evil thing that should be avoided at all costs.
While there are definitely times when you should be avoiding borrowing money, you shouldn’t discount the potential to manage your finances with a personal loan.
Here are some ways I’ve personally used personal loans to my benefit:
Borrowing For A Used Car: When I got my first car, I had some money saved up, but not enough to afford something reliable. Admittedly I also had some pressure to get a car that I wouldn’t be embarrassed to drive. So a personal auto loan was able to bridge that gap to get a vehicle that wouldn’t break down and would also keep me happy. It sure beat the alternative of taking the bus for another year or two with a very inconvenient route. That bus trip was wasting so much time and often put me in a bad mood.
Financing a New Car: Ok I made a mistake by buying a brand new car when I totaled my first car. It would’ve been a much wiser decision to again buy a slightly used car that had already depreciated a lot. It did allow me to get a pretty sweet car that I thought I could realistically afford. If you decide that a brand new car makes sense for you, you can often get very favorable interest rates on the financing. There are even times when you can end up getting 0% financing. With a rate like that, I’d rather keep my cash in investments and take on the monthly payments.
Retirement Investing Loan: When I was younger I wasn’t always so diligent with putting money away for retirement throughout the year. Suddenly the annual tax deadline for retirement investments would roll around. To balance out the side money I was earning online, I’d want to put money away for retirement to avoid part of the big tax hit that year. Luckily the bank offers nice low rates on loans used for that specific purpose.
Credit Card Balance Transfer: This may not be considered a personal loan in the traditional sense, but it really is a loan. When both of my car loans were getting close to getting paid off I transferred the balance over to my credit card at 0%. This saved me a chunk of interest and made paying off the remaining balance easier. I just had to make sure to pay off the balance before the transfer period expired.
Bank Credit Line: Again, not considered a personal loan, but it really is a personal loan that is always available to me. Fortunately it is at a low interest rate since I ask my bank for a lower interest once a year. When my car loan had about half their balance remaining I transferred the balance to my line of credit since it was at a lower interest rate. At that point, the balance was too high to comfortably transfer to my credit card, but I still wanted to save some money on interest. These days I don’t use my line of credit, but it is always there just in case.
Sometime next year I also plan to also take on a mortgage, the ultimate personal loan. That is the one type of loan that most bloggers do accept as something necessary. It’s quite unlikely that you’d be able to save up enough to buy your home with cash unless your city’s housing market is especially weak.
In fact a lot of loan companies now have practices in place to ensure people are responsible when lending money. One company (Friday Friday) even caps interest rates when it is clear people are struggling to make repayments.
So as you can see, while personal loans can lead to overspending and indulgence, they can also be a very useful financial tool. You just have to use some willpower and still limit the amount that you borrow. Also ensure it is only for things that you really need. Sometimes the interest rates are low enough that money put towards investments instead produces a higher rate of return.
How have you used personal loans to your benefit?