Dave Ramsey believes personal loans are “absolutely not worth” to pay off. Here’s why he’s wrong
Hearing Dave Ramsey’s advice on this topic may cost you in the end.
the main points
- Personal loans are a popular way to borrow money.
- Financial expert Dave Ramsey says personal loans are not worth buying.
- Staying away from personal loans may cost you money.
If you’re considering a personal loan, financial expert Dave Ramsey wants to convince you that doing so is a bad idea. On the Ramsay solutions Blog, answering the question whether a personal loan is worth it: “No. No. Not at all.”
Ramsay has some seemingly strong rationale for trying to deter you from taking out a personal loan. “Personal loans are totally not worth the stress and financial burden,” the blog says. “Loans leave you only a few steps behind where you started.”
But while it’s true that personal loans charge interest, Ramsay points out, the truth is that sometimes using this type of financing is actually a good move. Here’s why.
Personal loans can help make it easier to pay off debts
One of the biggest reasons Ramsey is wrong about personal loans is that these types of loans can make getting out of debt simpler, cheaper, and faster. This can happen if you use a personal loan to consolidate and refinance debts.
See, personal loans usually have more reasonable interest rates than credit cards, payday loans, and even certain other types of debt like some medical loans. If you can get a personal loan at 8% or 9%, versus taking on credit card debt at 16% or 17%, then you have made paying off your debt much less expensive. And if you can use an affordable loan to pay off several types of debt, this eliminates the problem of having to choose which other loans to pay off first.
Ramsay acknowledges that many people use personal loans to consolidate debt, and says he gets “the reason you want a loan to cover your unpaid credit card balance.” But he doesn’t endorse this approach because he says, “All you’re doing is using debt to pay off the debt and extend the life of the loan—which means you’ll actually pay more over time.”
The problem is that this is not always the case. If you choose a personal loan with a low interest rate and a short repayment period, you Can Make your payment much cheaper – and faster, too. So, instead of following this advice and assuming that personal loans are bad, you should check the details.
Compare the cost of paying off your personal loan balance on time against the cost — and time it will take — to pay off your existing debt so you can determine if debt consolidation makes sense for you.
Personal loans can also be an affordable way to borrow
There is another reason why Ramsey is wrong with personal loans: There are circumstances in which you can You have to borrow money. If so, personal loans can provide a predictable repayment schedule and are a cheap way to do so if you can qualify for a loan at a reasonable rate.
While Ramsey says that “if you can’t buy it, you shouldn’t buy it,” this advice doesn’t always work in practice. For example, if you need an expensive repair of your home or car right away or your child has an urgent need and you simply cannot pay for it out of pocket, then you should consider whether a personal loan is the best way to borrow for these basic expenses.
Of course, in an ideal world, you would have emergency savings and money for large purchases. But if you’re still working on it, don’t be afraid to consider a personal loan when you have to borrow for a real necessity.
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