Is the finance guru wrong on this issue?
- Dave Ramsey isn’t a fan of most types of debt.
- He doesn’t think you should take out a personal loan.
- The reality is that borrowing through a personal loan can sometimes be a wise decision for a few reasons such as: B. to consolidate credit card debt.
If you know financial expert Dave Ramsey, you probably already know that he’s not a fan of credit. In fact, he suggests avoiding most types of funding. And there’s a certain kind of debt he’s not supposed to take on because “it’s like trying to get out of a sinking boat with a bucket full of holes.”
What is the debt he is talking about – and is he right in recommending avoiding it?
Dave Ramsey is against personal loans
On his blog, Ramsey explained the most common reasons people get personal loans: debt consolidation at a lower interest rate; construction loan; and buying things you can’t afford to pay for outright. And he said none of those reasons are valid for borrowing.
“We know it might seem like taking out a loan will help you move forward or even offer some relief in the middle of a crisis,” Ramsey said. “But trust us, credit only leaves you a few steps behind where you started.”
Ramsey warned that it can be “a lot of work” to get a personal loan just to “get absolutely nowhere.” And he warned, “The weight of personal loans (plus the interest that’s automatically attached) keeps you from making any real progress with your money.” He also suggested that if you take out a personal loan, you’re in debt for life might guess, so you should just say no.
Is Ramsey right?
Ramsey is spot on that certain types of debt, like store credit cards and personal loans, are bad news. But when it comes to personal loans, he’s way off the mark.
First, personal loans don’t put you into debt because unlike credit cards, which allow you to keep charging them while you pay off your balance, personal loans don’t work that way. You borrow a certain amount of money and have a limited amount of time to pay it back. This is a major benefit of using a personal loan to pay off credit card debt because you can stay on a set schedule and know exactly when you will be debt free.
Second, personal loans can have much lower interest rates than most other types of debt, such as credit cards and payday loans. As a result, paying off your debt can become much easier and more affordable when you use it to consolidate and pay off debt. If you can pay off several other debts with a personal loan at a lower interest rate, there’s absolutely no reason not to as long as you can be confident that you won’t charge your credit cards again once you’ve refinanced them into the personal loan.
There are also situations when you really have no choice but to borrow something. While Ramsey says you can avoid this by saving for what you want and living on a budget, doing this takes time. If you haven’t already saved up an emergency fund and an important purchase that you can’t afford is creeping up on you, a personal loan could be one of the cheapest ways to borrow money to pay for it.
The bottom line is that taking out a personal loan has nothing to do with using a broken bucket to try to save yourself. It’s a very good tool to use in certain circumstances and you don’t have to shy away from it at all.
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