In some situations, a personal loan can open up great opportunities. Image source: Getty Images.
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Contrary to what many consumers think, loans aren't always "bad" debt. With low-interest rate sources of capital, such as personal loans, you can finance purchases that produce value for you, turning a debt into a profitable investment. With interest rates as low as 4%and terms of one to seven years, personal loans can be used to make money in a number of different ways.
1. Paying down high-interest debt
Getting rid of debt with debt can actually be a sound financial move. Debt consolidation allows you to roll multiple liabilities with various interest rates and repayment terms into a single, fixed-rate loan. This can not only help you pay down your debt faster, but free up some of your funds as well.
The extra cash comes by way of the reduced payments, which in turn stem from lower interest rates and the elimination of charges such as late fees, penalty interest rates, and annual fees.
If you have a total of $10,000 in credit card balances with an average interest rate of 18%, and you're paying a minimum payment of 4%, then it will take you more than 13 years to pay it off, and you'll end up paying a total of nearly $16,000. If you consolidated that same $10,000 worth of debt into a personal loan with an interest rate of 7.5% and a term of five years, then you'd only pay $12,000 total over that period. Your average monthly payment would be far lower, which would free up cash in the near term, and you'd save $4,000 in the end.
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You can use your newfound budgetary surplus to live a bit larger, boost your investments to create even more wealth, or -- more prudently -- make extra payments on your loan to free yourself from the burden more quickly.
2. Paying education expenses
Investing in yourself by furthering your education is one of the best uses of your money. According to research conducted by the Georgetown University Center on Education and the Workforce, obtaining a bachelor's degree or beyond can earn you from $2.3 million to $3.6 million in total earnings over your lifetime-- a sum few of us can afford to dismiss.Even if you don't want to go for a full degree program, career training and continuing education courses can have a similar, if somewhat smaller, effect on your finances.
Student loans are the most popular way to cover school expenses, but federal funds come with strict guidelines, while private lenders charge variable interest rates as high as 12%. While this is likely to be the best choice for college-aged students with little to no credit history and a full college career ahead of them, established professionalsmay find thatpersonal loans are the cheaper, more convenient option to pay for their continued education.
For starters, traditional student loans can't be applied to many continuing education and professional certificate programs, making personal loans your only financing option. Their lower interest rates and shorter repayment periods than the 10-year average for student loansalso make them a more reasonable alternative, especially if you only need to borrow a few thousand dollars. And unlike traditional student loans, personal loans can be discharged in bankruptcy if you get into financial trouble.
With public university tuition and fees averaging $18,000 a year, a four-year program can cost you $72,000. Add in loan interest at 4% for seven years, and you'll pay a total of $83,000, leaving you with a respectable return of over $2 million on your investment. Keep in mind that these figures are just averages. Youractual costs and earnings will vary based on the school you attend and the career you pursue.
3. Funding a business
According to Inc.com, 50% of businesses fail within the first two years, and a full 96% drop out within 10 years. The main culprit in most of these failures? A lack of cash flow. Finding the funds to start or expand a business can be as challenging as starting the business itself. Little (if any) profit, a lack of solid business history, and a limited paper trail make it difficult for fledgling entrepreneurs to qualify for conventional business financing under their company's name. Personal loans, however, only consider the creditworthiness of the owner, making it much easier to get approved. The process itself is also faster, often completing within a day or two, versus a week or longer with traditional business loans, so you can take advantage of fast-moving opportunities.
Be realistic about the revenue you can expect in both the short term and the long term to ensure that you don't overwhelm your new business with unmanageable debt. Integrate the loan payments into your accounts payable and make it a priority within the budget so you can pay it off as soon as possible. You can then use the funds that previously went toward the loan to further invest in the business.
These money-making strategies depend on getting the lowest interest rate you can find, but not everyone will qualify for prime personal loan rates. The amount you'll pay depends on a number of factors, including the loan amount, the length of the loan, your income, and your credit history. It's important to shop around for not only the best ratebut also the most favorable terms and fee structure. Above all, do your research to ensure that you're taking out the loan that's best for your situation.
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LaurenTreadwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.