The 3 Best Alternatives to Personal Loans, According to Dave Ramsey

Will any of them work for you? 

Personal loans can come from banks, credit unions, and online lenders. They typically have a set repayment schedule and can have a more affordable interest rate than credit cards. 

But despite the fact they can be an affordable type of debt, finance expert Dave Ramsey says that it is "absolutely not" worth taking out a personal loan due to the "stress and financial burden" this kind of borrowing can cause.

So, what does Ramsey suggest as an alternative? Here are three options he believes are better than a personal loan. 

1. Living on a budget

Ramsey says getting on a budget is your best alternative if you are relying on personal loans to pay for everyday expenses such as food and paying bills. "A budget helps you take control of your money by telling your money where to go before you spend it," Ramsey said. 

But while this may be true, the reality is that most people don't take out personal loans to pay routine expenses because it's not really practical. It can take time to apply for a personal loan, most lenders require you to borrow a minimum of a few thousand dollars, and loans are paid back over several years. And you don't get access to more money as you start paying them back. 

Since people don't usually plan to have a budget shortfall, apply for a multi-thousand-dollar loan, and then dole out the money over time to pay expenses, those who need to borrow for everyday living expenses would be more likely to use a credit card instead. And since a card can be more expensive, they'd actually probably be better off with a personal loan if they needed this kind of help. 

Living on a budget is definitely a better solution than borrowing to finance your lifestyle though -- so if that is something you're considering, you should heed Ramsey's suggestion and plan out how to spend within your means instead. 

2. Saving up for big purchases

For those who are borrowing to fund things they can't afford to pay for all at once, Ramsey has another alternative.

"Instead of jumping on the personal loan train every time you want something, what if you took time to save for it instead?" the Ramsey Solutions blog reads. 

This advice is definitely good to follow whenever possible. If you borrow to buy things -- even with a personal loan that can be relatively affordable -- then you're going to make all your purchases more expensive and make it harder to live within your means later. You want to avoid this whenever you can.

Of course, sometimes a surprise purchase comes up that you must make. If that's the case, a personal loan can sometimes be a cheaper way to fund it than a credit card so you'd want to explore both options to see which made sense in that situation. 

3. Getting serious about a debt payoff plan

Finally, Ramsey suggests getting serious about debt payoff rather than using a personal loan to consolidate and refinance debt. His favored debt payoff plan includes first saving a $1,000 emergency fund so you don't end up having to borrow once you've begun to pay down your debt. Then, he advises repaying your lowest balance loan first so you can score quick wins. 

While this plan can make sense for many people, it's not necessarily a bad thing to use a personal loan with a lower interest rate to repay as much of your high interest credit card debt or payday loan debt as possible. A personal loan can make your interest costs lower, and it comes with a set payoff schedule so you'll know when you'll be debt free. 

So, while Ramsey's alternatives to a personal loan can sometimes make sense, the reality is that a personal loan may be your best option in certain circumstances. Be sure to weigh Ramey's advice carefully and decide if it really makes sense for you to steer clear of personal loans as he suggests or if this type of borrowing could help you out in the long run.