Are Personal Loans Bad?

On today's "Dear Debbie", I talk about my experience with personal loans.

Hi Debbie, I noticed in your debt journey that you used a personal loan. I'm curious about your experience with it? do you think that it helped you on your journey get out of debt?

Dear Anonymous,

This is the second time I’ve gotten this question, and I thought it was so important I would repeat the answer.

The primary purpose of a personal loan is to help you consolidate your debt. What I mean by this is that a personal loan could allow you to pay off all of your credit cards at once (or even one high-interest credit card), and just be left with one, simpler, lower interest loan (i.e. the personal loan). This could be awesome for you - I say “could”, because paying down debt with debt could be a slippery solution.

The Bad

I’ve personally heard many stories of people getting themselves in “double trouble” - paying down their credit card debt with the personal loan but continuing to spend on their credit card, leading to 2+ large loans (the original credit card debt + this new personal loan debt). The issue here is that many people take out a personal loan thinking it will solve their credit card problem without addressing the underlying spending behavior that led them to credit card debt in the first place. This is a recipe for debt accumulation.

The Good

However, if you feel you can be a conservative spender and stop using your credit card, a personal loan can make a lot of sense in order to avoid the current high interest you are paying (a personal loan interest rate is typically much lower than a credit card). If you find that you don’t plan your spending or spend impulsively, a personal loan would probably work best if you immediately pay down your credit card, close the card, and build a budget after receiving the loan. This step will allow to start thinking about how to spending intentionally (i.e. with reason and clear purpose), rather than frivolously, and will hopefully help keep you on track on your debt-free journey. You can use your credit cards again later once you feel your spending is under control and you are in a better position to pay off the entire bill each month, rather than holding a balance.

Personal loans have personally (no pun intended) gotten me out of sticky credit situations, but it’s because I made sure to limit my credit card usage.

I hope you now have a better understanding of personal loans and you use them wisely. I think they can be an awesome tool if you take the time to understand your spending

Your financial friend,