Loans often have a negative connotation associated with them, but a personal loan can actually be used to gain wealth. Most people think that debt is horrible (I was raised to think that too). If you struggle to manage it, then debt can be your worst nightmare. However, if you know how to leverage debt, then you know how to use it to help you make money.
My goal is to always use debt to create cash flow.
How to Use Debt to Make Money
I’m from the camp that believes debt should always be used to increase your wealth. For example, I can use a mortgage to buy an income property and then rent it out for a profit. The opposite of this would be using credit card debt to buy a TV. My goal is to always use debt to create cash flow. Simple, right?
Personal loan amounts range between $1,000 and $100,000, depending on the lender and your credit. Loan terms are shorter than a mortgage, so you’re looking at something closer to 2-7 years.
Consolidate Credit Card Debt
Credit card debt can be one of the most suffocating types of debts. No matter who you are, your interest rate will most likely range in the 13.5% to 25%. According to CNBC, the average credit card debt in America is over $6,000. Depending on how aggressively you attack this debt, the interest paid could leave many families with zero cashflow. This is a big no-no. If there’s no cash flow, then you can’t build wealth.
Personal loans can help manage credit card debt by lowering interest rates and in some cases lowering what’s owed.
Build Equity in Your Home
If you’re a home owner, a personal loan can be a great way to help update your home to your family’s needs without moving (which saves money). It can also be a great way to invest money into your home, which you can cash out on when you move. Whether it’s a kitchen update or finishing a basement, spending a little money on your current home can be a great investment.
It’s important to discuss your options with a local real estate expert. Not all improvements yield a return, and you don’t want to overdo it for your neighborhood. If it makes sense, updating your current home can be a great way to save (compared to moving) and also increase the value of your home.
Consolidate/Refinance Student Loan Debt
Considered the next looming financial crisis, student loan debt is a hot topic these days. Most student loan debt holders have a combination of Federal and private student loan debt. Federal student loans carry some benefits when it comes to paying them back. It might not make sense to consolidate them. However, private student loans can cripple your cash flow. Variable and high interest rates can sneak up and become a burden fast.
Consolidating student loans into a single (and hopefully lower) payment can be a great option for many people.
Buy a Car with a Personal Loan
When using financing to buy a car, an auto loan is probably your best bet. Interest rates are almost always going to be lower. If you have less than excellent credit and a short history, using a smaller personal loan to buy a used car might be a good idea. Sure, it might not be your dream car, but it gets you to work and back. That’s why buying a car – something that depreciates the second you drive off the lot – is good for cash flow.
… a car is a tool to help you make more money.
Remember, a car is a tool to help you make more money. You need a Honda to get to work. The only time you need a Range Rover is when it doesn’t matter what you spend your money on anymore.
Create a Rentable Space in Your Home
Do you have extra room in your home that you could rent out? Pay off your home faster or simply add a new income stream by renovating unused space into a rental opportunity. Creating a rental space can be easy if you already have the space for it. If you already own a home that’s more square footage than you actually use, then sectioning off an apartment can be fairly simple.
The investment can be as low as from $5,000 depending on your current layout and utilities available. Before you start knocking down walls, connect with a local expert and consult with a knowledgable community. BiggerPockets.com is a great place to ask questions. Make sure you understand local laws, permitting, and the market for rental property to make sure that you can create cashflow with a personal loan.
What income creating strategies have you used with a personal loan? Leave a comment!
Note: Before implementing these suggestions, do your research to make sure you’re getting the best rates and making a wise financial decision. These suggestions are not guaranteed ways to build wealth.