This Is the Only Time Dave Ramsey Recommends a Personal Loan

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

Dave Ramsey hates personal loans. But here’s one situation in which he recommends using one to get out of a bad situation. 

Dave Ramsey is arguably the most vocal opponent to debt of any kind. He hates credit cards, holds a crucifix to loans, and won’t go near mortgages unless they have a maximum term of 15 years and are financed with a 20% down payment.

Be that as it may, Ramsey has admitted that a personal loan can come in handy for one — and only one — situation.

When does Ramsey recommend a personal loan?

Ramsey would never recommend a personal loan to finance a purchase. But he does recommend leveraging personal loans to get out of a bad situation; namely, when you owe more money on your car than the car is actually worth.

This is called being “underwater” on your loan, and it can put you in a tough spot. For instance, let’s say you own a car that’s worth $10,000, but you have a car loan with an outstanding balance of $13,500. If you were to sell the car for $10,000, you would still owe $3,500. Not exactly the best place to be in, especially if you default on your loan.

In an ideal situation, one in which you have plenty of savings, Ramsey would recommend that you pay the full $13,500 balance, which will put the car’s title in your hand. Assuming then that you can sell the car for $10,000, you would only have used $3,500 of your own savings to get out of the loan. You’d lose a car, but hey — at least you’re not underwater.

But Ramsey knows paying cash isn’t possible for everyone. If you can’t pay $13,500 upfront, Ramsey would recommend covering the difference with an unsecured personal loan.

In this scenario, you would sell the car for $10,000, then take out a personal loan for $3,500. This gives you $13,500 cash to pay off your car loan.

Wait — why would you use a loan to pay off another loan?

Easy: To get a better interest rate.

Many personal loans have lower interest rates than car loans. This might make your debt repayments cheaper and could help you pay the loan faster.

Is Ramsey right?

His advice is sensible, but I can think of two scenarios in which you might want to go your own way.

You need the car. It doesn’t make sense to sell if you’re using the car frequently. Unless you’re okay buying a rust bucket to replace it — which is problematic if you want something reliable — selling could make your life more difficult.You have an asset to put up as collateral. Ramsey recommends an unsecured personal loan. But if you have collateral — like a certificate of deposit (CD) — you could get a better interest rate on a secured loan.

Of course, if you’re on a mission to become debt-free, then you might want to follow Ramsey’s advice, no matter what it takes. In that situation, I would make sure I borrow enough cash on the personal loan to buy myself a reliable used car. For instance, using the example above, I might borrow $6,500 instead of $3,500, which would give me at least $3,000 to find a used car.

Whatever personal loan you land on, be sure you’re getting a competitively low interest rate. Check out some of the best lenders for low interest loans and see if your credit score is high enough for a low rate.

Our picks for the best credit cards

Our experts vetted the most popular offers to land on the select picks that are worthy of a spot in your wallet. These best-in-class cards pack in rich perks, such as big sign-up bonuses, long 0% intro APR offers, and robust rewards. Get started today with our recommended credit cards.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More