Whether you are trying to pay down student loans, erase credit card debt, start a family, or launch a dream venture, big dreams often come with big price tags. Sometimes the best way to achieve those long-term goals is to take on debt in order to stay financially stable.
That’s why a growing number of people are turning to personal loans to help make their dreams a reality. In the second quarter of 2018, personal loan balances reached a high of $125.4 billion, up 17.5% from 2017, according to a TransUnion report. And the number of accounts is on the rise also, up to 19.5 million, a 12.5% increase since the second quarter of 2017.
And the good news for all those loan holders is that the delinquency rate remains low at 3.21%, compared with student loan delinquency rates of 11.2%.
Financial advisers across the country say they are advising their clients to consider personal loans as a way to save money for everything from debt consolidation to starting their own business.
While personal loans are a form of debt, they are often a more cost-effective borrowing strategy than credit cards, specialized loans or hitting up mom or dad.
Here are a few ways personal loans can save you time and money (along with some helpful tips from financial planners.)
This is a major money saver, especially for young people who are digging themselves out from student loan debt or high-interest credit card debt. The average credit card APR is at 17.5%, a record high and a full percentage point up from last year. And that’s just an average — some credit cards carry APRs as high as 25%, even for consumers with good credit. Personal loan interest rates, by comparison, can be closer to 7%, meaning you will spend hundreds, if not thousands, of dollars less as you pay down your debt.
Sidney Divine, a certified financial planner with Divine Wealth Strategies, said he has advised his clients on several occasions to take out a personal loan to pay off five-figure credit card debt. One client, he said, saw a 10% difference in interest rates between the credit cards and the loan.
“Cash flow was improved,” he said, adding that this particular client had $35,000 in debt. “The client received a raise and is accelerating payments on the loan.”
Kayse Kress, a CFP with Physician Wealth Services, said she too advises clients to use personal loans to get out from under crushing credit card debt. One client recently used a personal loan to start climbing out of more than $75,000 in debt with a 19% interest rate.
“The personal loan refinance reduced the interest rate on their debt to approximately 8%,” she said. “The interest savings made this decision an easy one to recommend.”
In Vitro Fertilization
When family planning hits a medical snag, IVF is often a recommended course of treatment for women (and often their partners) who are having trouble conceiving the old-fashioned way. While assistive reproductive technology has boomed, both in popularity and success over the past two decades, it remains an often unattainably expensive procedure.
The average IVF cycle costs around $12,000, according to My Fertility Friend, and medication is often another $5,000. Then any number of variables, from further testing to embryo freezing to egg or sperm donation can inflate the cost of one IVF cycle to well over $20,000. And with most states not requiring even partial IVF insurance coverage, many couples are left with minimal or no medical coverage for fertility testing, medication, and treatment. That’s why they are increasingly turning to personal loans to get help in starting their family rather than racking up high-interest credit card debt.
There are several options out there for fertility-focused medical loans, the leader being CapexMD, which offers a generalized look at loan repayment on its site. But a general personal loan is also worth investigating as the interest rates may be lower than a highly specialized loan.
According to a recent survey by Student Loan Hero, 25% of prospective IVF patients plan to take out a personal loan to cover their medical costs.
Starting a Business
This can be a risky venture even in a good economy, as starting a business requires a significant amount of overhead in terms of space rental, equipment, and website design. And the risk to your personal financial safety may not be worth the gamble.
“Many entrepreneurs have a tight budget and, even if your spouse has enough income to pay for your household bills, a personal loan can help you bridge the gap,” Kress said. “Since the loan is being used for something that will establish a new source of income, you can create a plan for paying it off quickly.”
While personal loans can save you money in certain situations, financial planners are quick to caution against taking out loans for purchases that can — and should — come out of a responsible budget.
“I would not advise my clients to use personal loans for things such as vacation, lavish weddings, holiday shopping, home repairs, if possible, paying bills and buying everyday items,” Kress said. “We plan for those purchases using their regular cash flow from the income they earn.”
Sarah Netter is a writer whose work has appeared in The New York Times, The Washington Post and ABC News.