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 rate of 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 a (probable) return of at least 6% annualized.
I have also been known to occasionally use 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 pay down can be hampered by the realities of interest that compounds daily. Plus, it can be hard to pay more than the minimum on your credit cards when you have several cards.
Debt consolidation with a personal loan can help you streamline your debt repayment. If you can get 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 payments a month. 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 — and how much you can save — if you use a personal loan for debt consolidation.
Another advantage is that your personal debt consolidation loan isn't connected to your home equity, so you aren't putting your home at risk to consolidate your unsecured credit card debt.
Anytime you participate in debt consolidation, though, it's important to be careful. Now that you've paid off your credit cards with the personal loan, it can be tempting to run more charges on these “freed up” cards. This can devastate your finances further by putting you even more in debt. Before you use a debt consolidation loan of any kind, make sure that you have your spending under control and you are not living beyond your means.
Personal Line of Credit for Cash Flow Management
As a freelancer, I have a variable income and that presents its own budgeting challenges. Most of my bills are automated. From my retirement account contributions to my housing payments to my charitable donations, almost everything is paid automatically. While I try to pay many of my bills with credit cards (for the rewards) and then pay off the balance each month, there are some items, like my auto loan, student loan and housing payment, that 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 quite enough in my checking account to cover on just 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.
Personal loans can also be useful for unexpected costs that crop up, such as car repairs or even weddings. My own wedding was a surprise to everyone involved — we only had two months to plan! My parents ended up borrowing a small amount to help pay for it, even though my wedding was relatively inexpensive. Being able to access reasonable rates and a fixed and manageable payment can make these types of 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 you need it.
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.