Personal Loans Aren’t Always Bad Debt Comments54 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?

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By : Jeremy Biberdorf | 27 Nov 2012
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54 thoughts on “Personal Loans Aren’t Always Bad Debt

    1. Jeremy

      I remember you saying you got a 0% interest rate on your car loan. So it sounds like you’ve been pretty responsible with your lending and you probably have a pretty good credit rating.

      Reply
  1. John S @ Frugal Rules

    We had to use a loan for both of our car purchases, the last one just being paid off a few months back! :) I know for some a loan might be taboo, but there are times when it just makes sense and can be a useful tool.

    Reply
    1. Jeremy

      For sure, it doesn’t always make sense to wait to save up enough to purchase things in cash. Sometimes that strategy ends up costing more than the interest you’d pay on the loan. Not having to wait for things is nice too, as long as it is something you really can afford to pay off.

      Reply
    1. Jeremy

      For that low a rate it does make a lot of sense to finance instead of paying with cash. Getting more than 0.9% interest on an investment should be easy enough.

      Reply
  2. Catherine

    It’s true loans shouldn’t be weighed equally. I’ve done the credit card shuffle before transferring to 0% and it did what it was suppose to do, I paid it off within the 6month period. Honestly, even if we had the money upfront for a car, if I had a 0% finance term I would finance and ra-allocate my car savings, maybe put a down payment on it but I would budget for the car since it’s a payment I’m use to making.

    Reply
    1. Jeremy

      I’m in the same boat. If I was offered 0% financing when shopping for car, I’d gladly take it and use my cash elsewhere. Even the absolutely safest investment would help you come out on top in the end.

      Reply
  3. Liquid

    I love using personal loans. I took out $10K for a retirement loan (RRSP) last year. It was worth it because the stock market has done pretty well over the past year. By far getting a mortgage is one of the best financial decisions most home owners will ever make. They save money on rent, and build up equity at the same time. In the long run, I don’t know anyone who has invested in real estate in Canada and lost money consistently :0)

    Reply
    1. Jeremy

      I really like how you take out loans for investment leverage. Personally I don’t know enough about investing to be so bold, but it seems to be working well for you. And yeah a mortgage is a very smart move in the long run.

      Reply
  4. Grayson @ Debt RoundUp

    Oh loans, how much I love thee! I don’t think personal loans are bad, as long as you are responsible with getting them. I wouldn’t get them for everything, but I have used them in the past to help get out of debt (the balance transfer “loan” is my favorite). Nice post Jeremy!

    Reply
    1. Jeremy

      I agree that it’s not the loans that are bad, it is how some people use them. If you’re taking out a loan for a vacation, new tv or clothes shopping, then it’s definitely not the right choice. When used for bigger purchases that you really need, it can make a lot of sense. I should write a whole post about balance transfers. I think it’s a smart move that not enough people take advantage of.

      Reply
  5. Cat

    Not really, but now that we’re looking at getting a new car (or new to us), I may consider one. You’re quite right that they are okay as long as you have a plan to repay them!

    Reply
    1. Jeremy

      Also, you need to make sure you are getting the best rate possible. Some people jump at the first offer they get. By shopping around you can often find a lower rate.

      Reply
  6. Taylor @ Repaid.org

    Great article, and I agree on these. When it comes to cars, financial experts are always recommending not to finance them – instead to buy an affordable used car outright. But if you can get very low interest rates or 0% financing, there’s something to be said for having those funds in your bank account where they can act as an emergency fund – a very comforting cushion in this economic climate.

    Reply
    1. Jeremy

      Good point about an emergency fund. For many people having that emergency fund can save them from resorting to high interest loans when an emergency does strike. So if you are raiding an emergency fund to finance a car, it’s a pretty risky move.

      Reply
  7. Ashlee

    I had to finance my wisdom teeth removal on a credit card a few years ago, which had 0% interest for 18 months. At the end of the 18 months, I still owed a balance so I was fixing to be charged nearly $800 more! I freaked. But luckily I was able to get a personal loan at my local bank and save myself from that huge charge!

    Reply
    1. Jeremy

      That’s good that you were keeping track of when the interest rate was going up. The credit card companies often get to charge people big interest fees when people forget when the promotional rate expires. It’s smart to at least transfer that to a personal loan or line of credit in such cases.

      Reply
  8. Christopher @ This that and the MBA

    I dont see anything wrong with them as long as you are responsible…I have the bank credit line so that I can just pay all my bills on the first of the month and be done with them and so I do not have to move money from savings it sometimes triggers the overdraft account. Great feature since it doesn’t cost me anything.

    Reply
    1. Jeremy

      I have done that kind of thing with my line of credit. If something absolutely cannot be paid with in cash right away, I sometimes cover it with my line of credit for a few days or a week. When it is such a short term loan at a low rate, it really doesn’t cost much at all.

      Reply
  9. Jordann

    I’ve used personal loans to buy my used car, and I’m currently looking at refinancing my student loans at 0% interest (compared to 5.5% they’re at right now) which would be a big help. I think personal loans are just fine, as long as you can trust yourself to actually pay them back and not take on too many.

    Reply
    1. Jeremy

      Some people do get carried away with taking on more than they can realistically pay back. Then they start missing payments and rack up penalties. Plus they hurt their credit rating. So it is something that is incredibly important to be responsible with.

      Reply
  10. Matthew Allen

    I want to blatantly disagree with almost everything in this post, and all of the commenters thus far. But, I am new here so I won’t. Instead I will share what I did when I was young, dumb and broke.

    I once talked my credit union into giving me a personal loan for $800 to replace the transmission on my car. I explained to them that they held the loan on the car, and that their collateral was basically worthless if I couldn’t replace the transmission.

    Reply
    1. Jeremy

      Well I’m glad you’re not officially disagreeing, otherwise you’d have to actually back up your opinion. You’d actually have to read the full post and all the comments too. I guess that’s not a troll’s strong point though. I know some people are completely against personal loans, but then they end up missing out on how they can be beneficial. I guess that’s a personal choice.

      Reply
      1. Matthew Allen

        Oh, I read the entire post. And every comment above mine in it’s entirety. I’m not trolling. I got interested in your blog mostly because of your Wednesday posts that I stumbled upon last week. Thought I would read more out of curiosity.

        Just seems to me that disagreeing on a blog post isn’t exactly the best way to make friends – as apparent by all of the commenters above who seem so agreeable. You can’t tell me all these PF bloggers, many of whom are Dave Ramsey fans, are really so agreeable with a post like this.

        Reply
        1. Jeremy

          I’m personally not a fan of Ramsey as he makes everything so black and white. Things aren’t always a one size fits all situation. For people who have major debt problems, it makes sense to just avoid loans altogether. For people who are in better financial shape, loans can be a valuable tool. Something like a credit card balance transfer only stands to benefit people if used responsibly. The people who use low interest loans for investment leverage are often making a smart move too.

          Commenters do tend to be overly agreeable sometimes, but I’m sure if they were completely against loans they would still speak up.

          Reply
  11. Anne @ Unique Gifter

    I’ve used: 0% CC offer (Home Depot purchase), LOC for investments, car financing because it was a great rate on the money, mortgage loan and 99% of my spending goes onto a CC for the time value of money and the rewards.

    Reply
    1. Jeremy

      Those all sound like good moves to me. Well the line of credit for investments sounds a bit risky since the interest rate may be tough to overcome. I totally agree with putting 99% of your purchases on credit card. I try to do that, but I am still a little hesitant about the small purchases. The cash back on everything is nice.

      Reply
      1. Anne @ Unique Gifter

        Ya, I have done this and my spouse has done this. Both times were to make very specific moves and it was fairly easy to beat the LOC rate. When I was doing it, I had a negative effective tax rate on dividends, because I was really poor. It was basically secured by my spouses income though :-)

        Reply
  12. Jason @ WorkSaveLive

    Years ago I got a personal loan through Prosper which did help me consolidate some of my high interest debt and keep the wolves at bay when I was really struggling with money. I’m not sure I’d suggest this method to others, but it did work in my scenario as it was right at the time I started to turn my financial life around.

    Reply
    1. Jeremy

      If it helped turn your financial life around, it sounds like it worked out well. I have heard that debt consolidation can have a pretty negative effect on your credit rating. I guess it partly depends on your need for using your credit rating in the coming years.

      Reply
  13. TB at BlueCollarWorkman.com

    The car loan thing is key. When you get a new/used car, you want it to be freaking reliable so you don’t end up dropping thousands at the shop all the time or at AutoZone getting parts. I thinik a car loan, if hte car is reasonably priced and reliable, is perfectly okay!

    Reply
    1. Jeremy

      Not only would that get expensive, but it would be stressful and waste lots of time. I’m glad I’ve never owned an unreliable car that was breaking down all the time. I’d gladly take on a car loan to avoid that mess.

      Reply
  14. Canadianbudgetbinder

    I agree with Rod that credit is a tool. As long as one has a plan to pay it back and doesn’t keep spreading themselves thin adding more credit on top of credit that if the walls came crumbling down all the debts would sink as well. Mrs.CBB says she used an RRSP catch up loan years ago I’m sure of what you are speaking of. She used it to drop money in before the end and simply paid it back as soon as she could. Great post! Mr.CBB

    Reply
    1. Jeremy

      Yup that is the kind of retirement investment loan I was referring to. I just didn’t want to say RRSP and confuse Americans :) The banks there probably have similar loans for IRA’s or 401K’s.

      It is a dangerous game to be propping up too much money in loans. You have to be very certain you can pay it all back in a reasonable time frame.

      Reply
  15. John

    I’ve never heard of the “Retirement Investing Loan”. Is this just in Canada? I’ll need to look into that and see what options are available in the US. I always try to max out my Roth IRA each year so it’ll be an interesting option should I come up short.

    Reply
    1. Jeremy

      Hmm maybe it is only available in Canada. It might be worth asking about at your bank though. Those loans are usually a very low interest rate. I think the catch is that the low rates are only in effect for 6 months. So if you don’t pay the loan back by then you can get hit with higher interest rates.

      Reply
  16. KIm@Eyesonthedollar

    We rolled the last of our credit card debt into a 0% offer about a year ago and just sent in the last payment! I saved thousands in interest, so I hope not to get in debt again, but would do the same thing again if I had to.

    Reply
    1. Jeremy

      Good to hear that you used that strategy too. While those 0% offers can be a trap for some people, for others they can be a great way to save a decent amount of money on interest. You do have to be willing to keep paying down the debt even though the forced monthly payments disappear. I know in my case it was tempting to slack off on making the full monthly payments.

      Reply
  17. Veronica @ Pelican on Money

    I’ve never taken out a loan, but back in AM days I was considering taking out a loan to spend on ads. Crazy huh?

    Reply
    1. Jeremy

      That is crazy, although I did rack up my credit card consistently when I was heavily into PPC for my affiliate sites. It was to the point that the interest was eating up a big chunk of the profit.

      Reply
  18. Mandy @ MoneyMasterMom

    We used a 0% home Depot card to buy our appliances when we got our new house. We paid it off in full before any interest accrued, we just wanted to spread out some of the new home expenses.

    Reply
  19. James @ Free in Ten Years

    I don’t agree with most of your points here, but that’s OK. I have an extremely debt adverse stance – if you need to have a personal loan to buy a car it just means that you can’t afford it in my opinion.

    Having a car loan at 10% at $10,000 is costing you a $1,000 a year in interest which totally undoes any other good frugal work you might have done during the year. It rewards the attitude that we are somehow entitled to a particular standard of living whether or not we can actually afford it.

    A reliable, fuel efficient car can be had for a pittance and I don’t buy the excuse that there are circumstances where it’s beneficial to have a loan. Regardless of the monetary costs in interest, the worst thing it does is the ‘have now, pay later’ attitude that has infected our society.

    I’m not saying it’s the worst thing in the world if you’re smart and pay it back quickly and can be a useful tool in the right situation, I just disagree that buying a car should ever be done on credit, especially if one of the reasons is because you’re worried about being embarrassed by other people’s opinions of the car you drive. Unless you’re a car salesman it’s the least important thing in the world.

    The only people who will judge you on that criteria are other people who are in debt and crippled by what other people might think about them based on the possessions they have.

    Reply
      1. Jeremy

        I completely agree that shame is a lousy reason to buy a nicer car. I didn’t mean to justify that at all. It was a young, naive decision. With my first car there was no way I was going to stay miserable taking a bus to work for years to save up cash. I wouldn’t advise anyone to take 10% loan either, but at a more reasonable rate, it can make sense for some people.

        I know some people are more wary to get into any kind of debt, but what about the situations such as credit card balance transfers or using loans for investment leverage?

        Reply
        1. James @ Free in Ten Years

          Definitely makes more sense there. I’m just reluctant to ever recommend that someone does a balance transfer because it doesn’t address the underlying issue which is overspending. People need to learn to live within their means.

          Sure, a low or no interest rate will help but only if the person doesn’t get slack and just reduce repayments thinking everything is OK – then they end up in a worse position with even more debt.

          If the mindset is fixed first, then I don’t mind using debt cleverly, but for most people who end up in this situation they aren’t able to do it.

          Using debt for leverage is a fantastic technique for getting really rich quickly or really poor quickly! Make sense in real estate investing imo

          Reply
          1. Jeremy

            I do agree that these strategies can be dangerous for people who aren’t not financially responsible. A lot of people don’t remember to live within their means and they get into big debt that they have trouble repaying. By then they’ve developed a lifestyle they are comfortable with and they just keep overextending themselves.

            I know I’m pretty wary to try leveraging with investments, but if I was more confident in my investing abilities, I’d seriously consider. I have a friend that does quite well with it. You just need to have a sensible approach and not use it for random hunches.

            Reply
  20. Edward

    We are just 5 months away from paying off my wife’s car loan. It wasn’t our first choice, but there just wasn’t anything available in our price range for cash that didn’t look like it was going to fall apart on us. At that point, she had gone without a car for 2 years, but we were moving across town and no longer within walking distance of her job.

    Reply
    1. Jeremy

      Not buying a junk car was probably the smart move. You wouldn’t want your wife to be in that situation. So I have no problem with that decision since I’m sure you still tried to find the best deal.

      Reply
  21. Shilpan

    I agree with you that personal loan may be an option to consider when you can justify reasons to take that loan financially. One thing I have learned over the years is to always question status quo or stereotypical advice on all financial matters.

    Reply
    1. Jeremy

      That’s true. Just because a lot of people are giving certain financial advice, it doesn’t necessarily mean that applies to everyone. There are perfectly good reasons to get a personal loan. Some people are just prejudiced against them because they know that used irresponsibly they can get you in financial trouble.

      Reply

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