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The author, Choncé Maddox.
Choncé Maddox
Personal loans aren’t always the right choice, but I’ve learned they can be useful in many cases.
My husband bought his car in a private sale with a loan from his credit union and got a great rate.
When we were selling our home, we paid for renovations with a personal loan and paid it off after the sale.
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I used to think that personal loans were always considered bad debt, but then I realized that all personal loans are not the same. It’s a good idea to avoid payday loans, but my husband and I are perfectly fine with a low-interest personal loan every now and then.
Personal loans can come in handy when you need cash fast and can afford to pay the loan back in a timely manner. While taking on an additional debt is a burden, it’s always been important that I carefully consider the benefits and drawbacks of borrowing money and how the loan will be handled.
In the past, personal loans have helped us with some very important expenses, but I have a simple rule for deciding whether a loan is the right choice.
My biggest rule with getting personal loans is to aim to pay the loan back quickly — within 12 to 24 months. I always try to pay the loan back in around 12 months, but life can be full of surprises, so I allow some extra time if needed.
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Buying my husband’s car
A few years ago, my husband really needed a car, so we began looking. Around that same time, his coworker mentioned he was selling his car for around $5,500. It sounded like a great deal and when we checked out the car, everything went well.
With a private sale, we saw an opportunity to avoid going to a dealership and spending a ton of extra money. The only problem was coming up with the money quickly. We didn’t want to drain our savings as we were rebuilding our emergency fund at the time.
So instead, I talked to my husband about getting a loan through his credit union. I knew that this would be a better option for us since dealerships also charge a lot more for vehicles. Credit unions have more of a community feel and seemed to be more willing to work with us since they had a customer relationship with my husband already. He actually received a lower rate of around 5.5% for this personal loan.
Monthly loan payments were around $250, but we were able to accelerate payments and pay the loan off in a little under two years.
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Urgent home upgrades
Last year we moved out of state and sold our house, but it was a rough process. We had a deal fall through in the summer and decided to pay for some home improvement before listing it again in the fall.
Our Realtor requested that we paint the entire interior, get all new trim, get landscaping done, and do a few other upgrades. Also, at this time we were stuck paying the mortgage for our empty house as well as rent at our new house each month.
Our emergency fund was being drained due to the extra housing costs and paying out of pocket for the upgrades. So we decided to apply for a personal loan through Discover. Applying online was very easy, and the loan was funded within about a day.
We decided to borrow only what we thought we would need to finish up the repairs, which was $3,500. Monthly payments were around $89 with a 9.99% interest rate, but we didn’t have to pay them for long. After about three months of having the loan, our home officially closed and we used some of the profit from the sale to pay the loan off entirely.
I’m grateful we had good credit to qualify for a loan because if we hadn’t made a lot of the upgrades, this could have held buyers back from making offers and committing to our home. This could have just delayed the entire process and cost us much more over time.
We pay down our loans aggressively
Even if I extend the repayment term to several years to lower the monthly payment, I always try to pay the loan back in around 12 months, allowing for some extra time if needed. The main way I do this is by treating the loan not like free money or a way to delay a larger purchase, but rather an emergency.
While I enjoy the immediate relief we get when taking out a personal loan, my husband and I get to work immediately on paying it down aggressively whether by cutting back on expenses or side hustling to funnel more money toward the payoff.
Payments and interest can add up over time, and this takes away from money that could be used elsewhere in the budget along with savings. Some other rules I give myself for personal loans include:
Shop around to compare rates and terms. Several lenders and banks offer personal loans, so I like to compare rates and terms before applying. Sometimes, I use an online loan marketplace to compare rates all in one place.Pay attention to fees and hidden costs. Most personal loans come with fees like an origination fee, which can range from 1% to 5% of the loan amount, so it’s important to budget for this. I also make sure the personal loan doesn’t have prepayment penalties since we like to pay extra on our loans to get rid of them earlier.Look at the overall cost. It’s helpful to use a personal loan calculator so I can estimate costs before getting a loan. Then I look at our budget and see if it makes sense financially. Loans can do more harm than good if they cost way more than you expect in the long run.