Contrary to popular belief, personal loans can be helpful when it comes to your finances. Here's how I use personal loans to help manage my money.
In the world of personal finance writing, I'm a bit of an anomaly when it comes to debt. I don't mind getting an auto loan if my interest rate is lower than my expected return on investments. I also have no problem keeping my student loans to term since my rate is 1.9%. I'd rather invest the extra money for an annual (probable) return of at least 6%.
I have also occasionally used personal loans to smooth my finances. If you are careful about how you use personal loans and you understand the implications, they can help you manage your budget, especially if you are a variable income or if you are trying to pay off debt.
Debt Consolidation with a Personal Loan
Multiple debt payments each month can be frustrating over time. On top of that, if you are dealing with high-rate credit cards, your paydown can be hampered by the realities of interest that compounds daily. Plus, paying more than the minimum on your credit cards can be hard when you have several cards.
Debt consolidation with a personal loan can help you streamline your debt repayment. Consider a loan with a lower interest rate than what you pay on your high-rate credit cards. You can save money while reducing the frustration that often comes with making multiple monthly payments. Getting all of the debt under one roof can help you organize your plan, helping you pay off your debt quicker.
There are a number of calculators available online, like the Discover debt consolidation calculator, that can help you determine how much faster you can get rid of your debt. Learn how much you save, too.
Your personal debt consolidation loan isn't connected to your home equity. You aren't risking your home to consolidate your unsecured credit card debt.
Anytime you participate in debt consolidation, it's important to be careful. Now that you've paid off your credit cards with the personal loan, running more charges on these “freed up” cards can be tempting. This can devastate your finances further by putting you even more in debt. Before you use a debt consolidation loan of any kind, ensure that you have your spending under control and that you are not living beyond your means.
Personal Line of Credit for Cash Flow Management
As a freelancer, I have a variable income that presents its own budgeting challenges. Most of my bills are automated. Almost everything is paid automatically, from my retirement account contributions to my housing payments to my charitable donations. While I try to pay many of my bills with credit cards (for the rewards) and then pay off the balance each month, some items, like my auto loan, student loan, and housing payment, can't be put on a credit card. These come out of my checking account at the same time each month, no matter what.
However, there are times when a late payment from a client means that there isn't enough in my checking account to cover on the right date. This is why I turn to a personal line of credit for help smoothing my finances. My personal line of credit is connected to my checking account. When there is an issue (which doesn't happen very often), money is automatically moved between my personal line of credit and my checking account. I avoid costly overdraft fees, and as soon as the client's money hits my account, I pay off the line of credit, usually avoiding interest payments there.
What About Lump Sum Personal Loans?
Personal loans can also be useful for unexpected costs, such as car repairs or weddings. My own wedding was a surprise to everyone involved — we only had two months to plan! My parents borrowed a small amount to help pay for it, even though my wedding was inexpensive. Accessing reasonable rates and a fixed and manageable payment can make these expenses easier to manage in your budget.
While borrowing isn't the first choice for money management, it can make a good backstop for your finances if needed.
Disclosure: This blog post was written as part of a sponsored program for Discover Financial Services. All views expressed are entirely my own and were not influenced or directed by Discover Financial Services.
A lot of people put a stigma on loans, but some times they are unavoidable. We had to refinance a car we paid off to pay for our wedding. When we went to sell it, we were able to sell it for more than we owed. It ended up being a great thing for us!
When you are careful and do it right, you can use these loans for better finances. If I can finance a car for a low rate (which I did with my current car), I will. That’s because, rather than parting with the capital all at once for something that will depreciate in value, I can instead invest that money in assets with a better return. I get the car I want, and I can put my money to better use.
Yes, I totally agree with what you said. I also think that borrowing money is helpful it times when we need it. I think that we should just really have to use it properly and wisely. Thanks for sharing this article.
Yes, borrowing money is helpful but we have to be responsible in using it so that it will not affect our finances. Thanks for sharing this article.
You are a great example of a wise borrower! A loan that is used with a clear understanding of how it works, how much it will cost ultimately, and would you be able to pay it in full and on time is a helpful financial tool. Thank you for sharing your experience.
Many people now have multiple credit cards. How difficult it is sometimes to explain to them that it is extremely unprofitable) Miranda, thanks for the article. You write in an accessible and understandable language!
Make as much money as possible. Spend as little as possible. Invest a lot of what is left. Repeat as often as possible, for as long as possible.
Loans are an integral part of life. Just be careful not to fall into a debt loop.
This is a very helpful article. Thank you very much for writing it.