Key takeaways
- A prominent personal loan provider reports that 25% of people under age 35 use these high interest loans.
- Personal loans charge much higher interest rates than traditional types of loans and even higher than most credit cards.
- Using personal loans to take care of emergencies will make it very hard to move toward your financial goals.
- You can avoid incurring the bad debt associated with personal loans by saving some amount each paycheck to build an emergency fund.
All the people I’ve met who are successful investors have one thing in common: they save first and spend second. I bet you already know that because it probably makes sense to you. But this common thread shared by successful investors came to mind again after I read an article from Lending Point.
Lending Point provides personal loans and the article reported that 12% of those under age 35 used personal loans in 2015, but that personal loan use in that age group has risen to 25% in 2018. This troubles me because, in general, personal loans charge interest somewhere between 5 and 36 percent. This is much higher than you get with other traditional loans like auto loans, student debt, mortgages, etc., but it can also be even higher than what you get with most credit cards.
The fact that personal loan use is on the rise with younger people means they’re incurring greater amounts of debt. This translates into more money going out the door that’s not available to save for the future.
What do you do instead?
The first step involves a major mind shift about how you ensure you don’t get into a future situation where you feel you need a personal loan. If you’re already in a situation where you’re paying back these loans, you need a strategy to get out of it. The next step is building an emergency fund so that when something unexpected comes up — the examples the article gave were weddings, credit cards, and emergencies — you have the ability to take care of it by paying for it right away.
An emergency fund allows you to avoid taking out a personal loan at 20% interest or higher, which you have to pay back. These loans make your cash flow situation much worse and eventually slide backwards, so it’s important to try not to use them. Make sure you’re saving some amount to act as a buffer when those emergencies, or other things, come up. That way you won’t have to resort to a personal loan as a last source of credit, which will come at the highest interest rate out there and will make it really difficult to move forward in life.
Hopefully, this trend will reverse itself and we’ll see more young people using traditional debt and, again, also saving money so they can avoid taking on the bad debt to begin with. Next time you consider personal loans, make sure you get your savings house in order first. That will definitely help you in the future. Until next time, enjoy.
Gary