4 Lucrative Ways to Use Your Personal Loan

A Couple smiling because they got a 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 do get stuck in unnecessary debt for years.

In fact, approximately 54% of Americans carry credit card debt from month to month as of 2021.

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.

Best Personal loans

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 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 to 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 both refinance and consolidate 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 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