Still, there are compelling reasons why you should sometimes say “no.” Credit is nice to have, but it’s not always nice for you.

Here are some reasons why it’s better to pay cash if you can:

Paying cash means no interest charges. Well, duh. It’s basic, but many people opt for the convenience of credit instead of just paying cash. They fully intend to pay off the balance, but they don’t and then wind up paying interest charges.

Patience is a virtue and it builds character. OK, let’s say you are considering a personal loan to buy a boat. Now, it’s June, so you’re really just on the cusp of the summer boating season. You know you’ll be able to save up enough money to buy that boat in 3 months, but by then it won’t be boating season.

So, you go down to your bank and get a personal loan. Over the life of that loan, you’re going to pay another $3-5 grand in interest, depending on how much the boat costs. If you can wait just one more season, you can pay cash. No, it’s not easy being patient, but it does pay off.

Credit is designed for purchases that you can’t pay cash for. Most folks, no matter how much they save, aren’t going to be able to pay cash for their home. That’s why home loans are important, and that’s why most people use them. On top of that, your home is an investment that may, in the long run, be worth more to you than what you pay on your home loan.

But just about everything else can be bought using cash. Yes, there are some items that you can’t wait to save up for (such as a car). But anything you can pay cash for you ought to.

Photo via bfishadow

There are some important things to watch out for when you take out a personal loan, to make sure it’s worth it:

• Be sure you can pay it. If you can’t make the payments on a personal loan, you’re going to have problems. If it’s a secured personal loan, such as a loan that you use for a  car or boat, the lender can repossess the property. Whether it’s secured or unsecured, not paying it can really screw with your credit.
• Watch out for personal loans from family and friends. Yes, these can be a good thing. But if it doesn’t go well, you can mess up everyone’s Thanksgiving dinner with a heck of a lot of bitterness and anger. Think twice before asking family or friends for a personal loan, and even then go about it the right way.
• Paying cash is better. There are only a handful of situations in which taking out a loan is better than paying cash, if you have it. A home loan, as we mentioned, is one of those. But for the most part, the meager interest you would earn on leaving the money in a savings account combined with the interest you’re going to pay on the loan just makes it a better thing to pay cash.
• Be careful of debt consolidation. You might take out a personal loan to pay off a bunch of credit cards. While that can be a good thing, the danger is that you’ll go out and max out your credit cards again. If you use a personal loan to pay off debt, put safeguards in place to make sure you don’t just go out and accrue more debt.

Photo via Neil Rickards

At other times, you can feel like you’re stuck in personal loan hell. How does this happen? There are a couple of possibilities.

The Myth of Debt Consolidation

So, someone has talked you into consolidating all of your credit card bills into a lower-interest personal loan. While that may seem like a good idea, and while it may help you get a handle on your financial situation for a little while, the fact of the matter is that it can be dangerous.

Why is that?

Well, there is a reason you accrued all of that credit card debt in the first place. Chances are you like to buy stuff. You want to buy stuff. With your credit cards all paid off, there’s nothing at all to stop you from buying more and more stuff.

Within a few months, or maybe a year at the most, you find yourself twice as far in debt. You’ve maxed your credit cards out again, and you still are making payments on your personal loan.

Still think that personal loan was a blessing?

When Your Circumstances Change

So, let’s say you used a personal loan to buy a boat. Forget the credit cards for a few minutes. That’s great! Unfortuantely, the housing market collapses, which leads to the financial industry collapsing, which leads to the auto industry collapsing, which puts you out of a job.

If I’d have said that a few years ago, you’d have thought I was being a worry-wart. Yet, it’s the situation many folks find themselves in.

So, what happens? Well, you’re barely making your house payment, and you stop paying on your personal loan altogether. The bank comes to get their collateral, and they don’t give you anything in return for it. You’ve paid on that boat for 3 years, and only had a dozen payments left.

Too bad. You’re screwed. You’re in personal loan hell.

What’s the moral of the story here? Take out a personal loan if you need to, but recognize that, just like with any other kind of credit, you’re putting yourself at risk.

Photo via comedy_nose

Some of these plans work. Some don’t. Everyone’s situation is, to say the least, different. Still, there is a foolproof process that you can use to get out of debt:

Pay your debt off.

It sounds simple, of course, and it’s much easier to say it (or type it in bold letters) than it is to do it in the real world. Still, that’s really what’s at the heart of getting out of debt: paying it off.

If you have at least enough money to meet your basic needs and some money left over each month, you’re ahead of the game. If you don’t, you need to figure out a way to reduce your expenses, increase your income, or both.

If you don’t have enough money coming in, you can’t pay off your debt.

That’s the problem that many people face. They want to pay off their debt, but they don’t have money enough coming in to actually do it. To really pay off your debt for good, you need to increase your excess income.

Now, reducing expenses can go a long way toward increasing your excess income, of course. If you can be more frugal, you won’t have to earn as much extra money in order to make things balance out.

You need to do more than just make things balance out, however. You need enough income to snowball your debt away. What does that mean, exactly?

You get rid of debt by paying it off, consistently, every month.

Even when you’ve paid off a credit card, you don’t pay less on your debts. You take the money you were sending to that credit card and you send it to the next credit card, or to a personal loan. Your debt payments, in effect, create a “snowball” that will have you out of debt in no time at all.

Photo via baligraph

"Flag raising on Iwo Jima." Joe Rosenthal, Associated Press, February 23, 1945. National Archives and Records Administration (ARC Identifier: 520748).

While there is talk in Washington of trying to create new regulations about exactly how much credit card companies can charge you in interest fees, the fact remains that some credit card companies just seem out to get their customers in trouble. The interest rate on some credit cards, especially if you miss a payment, can skyrocket. You can find yourself with an interest rate that’s quickly approaching 30 percent if you’re not careful.

This, obviously, creates a bit of a problem. You wind up accruing so much in interest charges and late fees that your credit card debt grows and grows rather than shrinking. Eventually, if you’re having trouble making the payments, it will even affect your credit score.

One way to get rid of those high-interest credit card fees is to simply pay off the credit cards. Obviously you can’t just pay it off from your checking account. If you could, you probably wouldn’t have used the credit card in the first place.

A personal loan can be a great way to reduce those fees. You can take out a personal loan from your credit union, bank or other lender for the purpose of paying off other debt. This kind of a personal loan is often known as a “debt consolidation loan.” In many cases, the lender may be willing to send the payments directly to your credit card companies, reducing the possibility that you’d spend the money elsewhere.

There are a number of different types of personal loans out there. There are unsecured personal loans, for example. These kinds of loans don’t use any collateral as a security for the loan. As such, the interest rate on an unsecured personal loan is likely to be higher than some of the other types. Still, it’s also likely to be less, probably much less, than the interest rate on your credit cards.

Secured personal loans may be a better bet, if you can get one. A secured personal loan requires some sort of security – usually a home or property – to back the loan. In the case of a home, this type of loan might be referred to as a “second mortgage” or a “home equity loan.” These loans will have a lower interest rate than an unsecured personal loan, and will save you the most money in fees overall.