What’s a Consumer Loan?
First thing’s first, it’s a type of personal loan (as opposed to a commercial or business loan). So, it’s cash you’re borrowing from a bank, credit card company as an advance, or less reputable lender (e.g. a pawnshop) to do or buy something. Broadly speaking, the “something” people take out these loans for falls into one of three categories: personal (buying stuff like clothes or a car; paying for medical expenses), family (vacation; tuition expenses), or household (buying appliances; repairing an air conditioner; etc). So what type of loan isn’t a consumer one? For our purposes, mortgages, or loans secured by and used to buy a house, are not consumer loans, but more on those in the real estate section.
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| Yes, 35.99% Is an Insanely High Interest Rate! |
Why These Loans are Toxic
Conceptually, consumer loans are absolutely toxic because you’re borrowing money at stupid high interest rates (see above) to buy things you don’t need with money you don’t have, a surefire approach to never achieve financial independence. Growing your wealth comes down to simple math. Every pay period, you need to save more money than you spend - there’s no other way. Massive interest payments on loans for unnecessary purchases can make it challenging to accomplish this. And, for those things you absolutely need some extra cash for, that’s why you have an emergency fund, to keep you from falling victim to the endless, wealth-draining death spiral of consumer debt.
A Sidebar - New Cars are Stupid
I apologize in advance, but I’m going to get on my soapbox here for a minute. Yes, buying a new car, especially if you have to borrow money to do it, is stupid. Basically, this is a way of telling the world you want to look wealthy, not be wealthy. When you drive a new car off the lot, it immediately loses 11% of its value. Now, I’m not saying buy an old, unsafe, poorly functioning car - you’ll likely end up wasting just as much money on maintenance. But, unless you’re a long-haul trucker or someone who actually needs a pickup for work, a car is only for getting from Point A to Point B. Why spend an exorbitant amount of money to do that, when you can get a good, fraction-of-the-price deal on a safe, reliable used car? Remember, true wealth is not about appearance, it’s about the financial freedom to do what you want and live your purpose, and it takes discipline and smart decisions to get to that point.
The Should-I-Get-This-Loan Sanity Check
If you’re already paying back a consumer loan, that’s fine, we’ll tackle that debt in Phase 2. But, don’t take out any more of these toxic loans! Generally speaking, there’s a very easy question to ask to see whether it’s a good idea to borrow money: will this loan make me money? More specifically, will the interest I earn from what I do with this money be more than the interest I’m charged by the bank for borrowing it. Loans can be a great way to build wealth, especially with rental real estate, but borrowing money to buy stuff you don’t need is never the answer.
Questions? Thoughts? Recommendations for another topic? Let us know in the comments!
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