4 Lucrative Ways to Use Your Personal Loan

The personal loan is one of the most versatile financial tools available. You can use it on nearly everything.

Now, plenty of people take on debt to go on vacations, fund weddings, or buy fancy new toys. Although nothing is stopping you from doing these things, many people who do get stuck in unnecessary debt for years.

In fact, nearly half of Americans are in credit card debt as of 2020.

Thanks to statistics like these, personal loans fall under the umbrella of “all debt is bad”.

But when used correctly, personal loans could improve your finances.

 

Why Get a Personal Loan?

Debt is essentially a tool, like a hammer. Hammers can destroy and harm, or they can build and repair.

Similarly, personal loans can build up your finances thanks to a concept called leverage.

Leverage is essentially using someone else’s money to increase your investment in something, and thus, make a greater return.

Leverage is how most businesses grow. They take out money from the bank, invest it in new projects, and earn even more than they could have with their own funds.

Think of a real estate investor with $100,000. He could buy one $100,000 rental property that earns him $10,000 net a year, or he could put $20,000 down on five rental properties and get 30-year, $80,000 mortgages at 4% interest ($3,200/year) on the rest. In the mortgage scenario, he’s now earning $100,000 a year while paying $16,000 in interest. That leaves a profit of $84,000.

This same concept can apply to personal loans. Use it right, and you could earn more returns on an investment.

Are There Personal Loans for Bad Credit?

Personal loans for bad credit do exist, so don’t count yourself out. You will have to make some sacrifices, though. Personal loans for bad credit usually charge higher interest rates or require you to put down collateral to offset the lender’s perceived risk of you.

 

Ways to Use a Personal Loan

1. Consolidate and Refinance Debt

Consolidating debt is the process of turning many debts into one. It involves taking out one large loan to pay off several debts. Doing so makes your debts much easier to keep track of since you reduce the number of loans you have to manage.

Refinancing debt is related but different. It involves taking out a new loan at a lower interest rate to replace an older, higher-interest rate loan. As a result, you will likely save a substantial amount of money on interest over the long term.

Personal loans are used for one or the other, but mostly both. By consolidating and refinancing simultaneously, you can score a lower interest rate while also streamlining your finances.

In fact, personal loans are one of the best ways to consolidate and refinance credit card debt at the same time.

Now, you have to be sure that your new interest rate is greater than the weighted average interest rate of your old debts when you refinance. In other words, you have to calculate your average interest rate across all of your debts but also factor in how much each debt contributes to the total.

The math sounds complicated, but fortunately, you can find a personal loan calculator online that, in addition to helping you calculate monthly payments, can help you figure out your weighted average interest rate with ease.

With this in mind, finding low interest rates on personal loans for bad credit won’t be easy. You may not be able to find one at all, but it’s worth looking anyway.

2. Establish an Emergency Fund

Are you financially prepared for an unexpected event, such as a car accident, job loss, or home repair? Experts often recommend having three to six months of expenses stashed away in an emergency fund. That way, you won’t have to run up substantial debt at a high interest rate on a credit card should something happen.

However, not everyone has enough set aside for emergencies. You might be living above paycheck-to-paycheck, but your amount of leftover cash may not be much. It might take you months to save for an emergency.

And should something happen in that timeframe, you’ll be forced to exhaust what little emergency fund you have, then put yourself deep into debt via credit card or payday loan.

Instead, you could compromise by taking out a personal loan if you have good credit. You’ll be able to immediately fill up your emergency fund while making monthly payments back to the lender.

Interest rates on personal loans tend to be lower than those on credit cards — so a personal loan could be considered lucrative in this regard.

Now, a personal loan might not be the best method for you to do this. If you live far below your means and you’re in a stable financial situation, you may be able to stock up your emergency fund fast. You’ll then be able to avoid paying the money back plus interest.

On the opposite side, this won’t work if you’re living paycheck to paycheck. You need to come up with extra funds to make the monthly payment each month.

3. Invest in Your Home

Perhaps you’ve been considering some home improvement projects. Maybe a kitchen or bathroom remodel. Or maybe you’re adding a deck out back.

These projects will make your home more enjoyable to live in, but they’ll also potentially boost its value. If you ever sell your home in the future, or if you ever want to leverage your home’s equity to get a loan, then a home improvement project could offer solid returns.

Home improvements aren’t cheap, though. Whether or not you have cash saved up for improvements, a personal loan could provide the funds you need to see your home improvement plans through.

Now, personal loans are likely your best option only if you have little equity in your home and a lower credit score. It will be hard to borrow against your home when you don’t “own” much of it in the first place. Plus, there are personal loans for bad credit that make it easy to fund your home improvement projects if your credit score has taken a hit recently.

But if you already have substantial equity in your home, home lending options would be the better route.

Home equity loans and lines of credit, for example, offer low rates and long repayment terms (since your home secures them). Meanwhile, cash-out refinancing allows you to possibly lower your rate while receiving some cash — cash you can use to invest in your home.

With this in mind, a personal loan would work well if you’re buying a “fixer-upper” home at a low price with plans to make improvements and bolster the home’s value.

Ways to Use Your Personal Loan

4. Start a Business

One of the most lucrative ways to use a personal loan would be to invest in yourself by starting a business. Work hard for a few years to get your business off the ground, and your returns will far outweigh your investment.

What about business loans, though? Are those better than personal loans?

Business loans are often easier to get if you’ve been in business for a few years and have proof of growth and revenue. If you’re looking to start a business, things won’t be so simple. You’ll have to show strong evidence of personal income, a high credit score, and have a bulletproof business plan. You’ll also likely need collateral.

Although the SBA indeed offers loans to new businesses with no collateral, those loans can often take weeks to process and arrive. Even the SBA Express program requires extensive paperwork and takes a while.

On the other hand, personal loans only require a few pieces of paperwork.  The requirements aren’t always as stringent as the SBA’s. You’ll get the best interest rates with a good credit score, but rest assured that there are personal loans for bad credit, too. Plus, you can go from application to loan disbursal in as little as 1-7 business days. Getting personal loans online may often take less time than through traditional lenders.

 

Shopping For Personal Loans

Now, you shouldn’t take the first personal loan offer that comes your way. You want to shop around for the best possible rates. Thanks to advancements in fintech, you can now shop for personal loans online with ease, making rate comparisons simple.

Once you find a few reasonable offers, use a personal loan calculator to figure your estimated monthly payment based on the terms presented to you. This can help you budget for your future loan payments so you don’t run into any problems.

 

Conclusion

Whether it’s protecting yourself against other, more expensive forms of debt or boosting your returns on an investment, personal loans are financially constructive tools when you use them right.

Make sure to use a personal loan calculator before moving forward with an offer. The personal loan calculator will help you evaluate which offer is the most cost-effective, as well as help you plan for repayment.

Bradley Schnitzer Bradley Schnitzer Last update:
Bradley Schnitzer is a copywriter and content writer that helps businesses gain loyal customers through informative content pieces and persuasive copy. He is passionate about personal finance and helping budding freelancers further their careers. He spends his free time reading, hitting the gym, pursuing several intellectual interests, and drinking coffee.