Dave Ramsey Says This Move Could Help You Avoid a Personal Loan

It's a simple step worth taking.

There's a reason consumers are often tempted to borrow money via a personal loan. These loans are known to offer competitive interest rates, and also, they let you borrow money for any purpose. 

Want to renovate your home? You can use the proceeds from your personal loan to update your kitchen, finish your basement, or improve your master bathroom. But you can just as easily use the money you borrow with a personal loan to go on vacation or upgrade your wardrobe. 

But while borrowing money with a personal loan might seem like an affordable bet, these days, borrowing rates are up across the board in the wake of interest rate hikes on the part of the Federal Reserve. So while a personal loan balance might cost you less than, say, a credit card balance, it's still debt nonetheless. That means you'll need to not only pay it off, but also, cover the cost of interest. 

You may be better off avoiding a personal loan entirely. And financial guru Dave Ramsey has some great advice for making that happen. 

When you don't need to rely on borrowing altogether

Many people wind up taking out personal loans for big home projects they can't swing without borrowing. But often, personal loan applications stem from emergency situations -- scenarios like your car needing sudden repairs or your home needing to be fixed. 

Having a solid emergency fund could make it so you have cash reserves to tap the next time a need for money arises. But that's not the only step you can take to avoid a personal loan. Ramsey says that in addition to saving money, getting on a budget could be your ticket to steering clear of all kinds of debt, personal loans included.

As Ramsey says, a budget will tell you where your money should go before you ever spend it. That way, you can allocate funds to different expenses and avoid debt. You can also allocate funds to your emergency savings on a monthly basis, thereby building up cash reserves so you're in a position to tackle unexpected bills as they arise. 

Be careful when taking out a personal loan

While it's true you might snag a competitive interest rate on a personal loan, especially if you're a borrower with a solid credit score, the reality is that any time you take on debt, you cost yourself extra money in the form of interest. A $3,000 home repair could end up costing you $3,500, for example, by the time you're done paying off a loan. 

And also, any time you take on debt, you run the risk of falling behind on payments, which could cause severe damage to your credit score. So if you're able to avoid a personal loan, or any type of loan, then it's probably in your best interest to do so -- even if that means having to put off a home improvement project, vacation, or another expense that might enhance your quality of life.