Can taking out a loan save you money? Sounds counter-intuitive, right? But if you use the right strategy, borrowing money can save you money in the long run. Here’s how:
Paying Off High-Interest Debt = Long-Term Savings
Credit cards are expensive. The average credit card has an interest rate of 16.03%. For every $100 you spend, you’re paying $16.03 in interest every month. Some credit cards have rates of 23.99% or more.
Personal loans, on the other hand, can have rates as low as 5%.
If you have credit cards with high-interest rates, you can actually save money by taking out a personal loan and using that cash to pay off your cards. The better your credit, the greater the savings. But even with average credit, you can probably save money by taking this approach.
The goal is to use your personal loan to pay off your credit card debt. This leaves you with one bill and – usually – a lower interest rate. The lower rate will save you money.
- $1,000 at 16% interest over 5 years would cost you $1,488 total
- $1,000 at 5% interest over 5 years would cost you $1,140 total
The personal loan would save you $348. That’s $348 you could put towards something else – like enjoying life.
Use this calculator to see how much you can save with your own credit card debt.
You can use a personal loan to pay off any kind of debt:
- Student loans
- Credit cards
- Car loans
- Other personal loans
But to really save money with this approach, the personal loan’s interest rate needs to be lower than your credit card, auto loan, etc.
Who Would This Work For?
It’s up to you to decide whether this approach is right for you, but this may work for anyone who:
- Has a lot of high-interest credit card debt.
- Has decent or fair credit.
- Wants one payment instead of multiple payments.
Improving Your Credit = Better Rates in the Future
Taking out a personal loan can also help you save money by improving your credit. Over the long-term, a higher credit score will save you money through lower interest rates on credit cards, mortgages and auto loans.
If you’re just starting to build credit or you want to boost your score, a loan may help you reach your goal. It’s a little risky, but the payoff will be worth it if you’re disciplined.
Here’s the idea:
- You take out a personal loan.
- You pay off the loan over a year or two.
- Your credit improves.
- You also get instant savings (loan funds).
With this approach, you’ll be forced to pay your loan every month – teaching you discipline – and at the end of it all, you should have a higher credit score.
Sure, you’re paying more because of interest, but that may be a small tradeoff if you can boost your score and secure a decent rate with the loan.
Who Would This Work For?
- Someone who wants to build or boost their credit.
- Someone who can afford to take on a loan payment.
- Someone who wants to prepare for buying a home or car.