How to make debt work for you and build wealth with a personal loan

Borrowing money to make money may seem counterintuitive, and negative feelings around debt can hold some people back.

“There’s a lot of shame around debt for people who did not grow up wealthy, or who did not grow up with generational wealth [or] with the knowledge of how to leverage debt and use debt as a tool to grow more money,” says Charly Stoever, a money coach, speaker and host of the Unicorn Millionaire podcast. Stoever used debt to help fund their business, despite growing up believing credit cards were a bad thing and one must up and pay in full.

“There’s a lot of attaching personal values and morals to having the ability to pay for things upfront in full versus having to borrow money,” they say. “At the end of the day, all debt is is borrowing money to get something you could not otherwise have or don’t want to use cash to pay [for it].”

If used correctly, personal loans and other forms of debt can be great tools for building wealth. By consolidating high-interest debt, funding business expenses or helping you increase an asset’s value, personal loans can help you earn more income or gain access to more money. Just remember that it’s only part of the plan.

Knowing how to use debt to build wealth, strategically incorporate it into your plan and avoid risk can help you accomplish your financial goals.

How to use personal loans to build wealth

1. Consolidate debt

High-interest debts are harder to pay off and cost more over the life of the loan. High balances can also affect your debt-to-income (DTI) ratio and credit utilization ratio, which can make it harder to borrow in the future.

Debt consolidation loans combine your various debts into one loan with one interest rate and payment. By consolidating your debt, you can build wealth in the following ways:

1. A personal loan uses one lump sum to pay off revolving debts, then you make payments toward a loan that doesn’t offer more credit as it’s paid down. This can remove the temptation to reuse the credit and stay in the debt cycle.
2. Personal loan rates are typically lower than credit cards, so you can pay less interest on your debt.
3. Consolidating debts into a personal loan can help you pay off debt faster. Once you pay off your debt, you’ll have more money to put into savings or use toward investing in your business and future.

2. Grow skills and expertise with training and coaching

Investing in yourself through training, coaching and certification classes may make sense if it increases your earnings potential. The return on investment (ROI) may come in the form of higher earnings and more promotions because of the extra skills you obtain. It could also come with more business as you earn certification or learn strategies that help your business grow. 

Stoever’s investment in coaching programs helped them lead to success, but it also required them to do the work. 

“You’re still able to invest in these high-ticket programs that are helping you make a return on your investment if you do the work,” says Stoever. “When I paid the $3k for my business coach, I did the work. I listened. And the month later, I doubled my investment. I made $7,500 in sales … because I implemented and did the work. And I saw the return on my investment.”

For Stoever, the coaching programs garnered an ROI in more ways than one. They say the programs have helped them increase sales, grow their skills and be in a community with other business owners, which helps them avoid isolation and burnout.

“I think it’s important to, if you do go into debt, really consider the return on your investment monetarily, but also emotionally,” they say. “Not everything has to have a monetary return on your investment. It’s important for me to have that emotional ROI.”

You could use a personal loan to pay for business coaching, various training courses or certification programs. Most personal loans will not allow you to use funds to pay college tuition. If you wish to pay for higher education, apply for the FAFSA to find out what federal aid you are eligible for, and consider private student loans if you need to bridge the gap in tuition.

3. Finance home improvements

Personal loans can also be used to build wealth through equity and rental income. Using a personal loan for home improvement gives you fast access to cash without using some of your home’s equity.

There are many ways home improvement can increase a home’s value, thus increasing your equity or rental income:

• Replacing the roof as well as outdated home systems, including plumbing, electrical or heating.
• Enhancing energy efficiency by installing solar panels, energy-efficient appliances or improving insulation.
• Improving property appeal through renovations, updates and landscaping.
• Waterproofing the basement or getting the foundation repaired to ensure the home is in good condition to sell.
• Adding an egress window to a basement so it is considered livable space and counted in square-footage.
• Fixing up a room, section of the home, accessory dwelling unit or other property to rent out to tenants and make a profit.

4. Start a business

Business founders can use personal loans for their business in a variety of ways, such as covering startup costs and accelerating expansion and scaling efforts. Personal loans can also be instrumental in launching new product lines, conducting market research, expanding into new markets, renovating office spaces or enhancing customer service. Leveraging personal loans strategically can help founders seize better opportunities and propel the business towards more success.

Be sure to compare whether a personal loan is a better option than a small business loan. If you already have a financial history for your business, a business loan may be the better route, but a personal loan may be easier to qualify for if you’re just starting out.

A personal loan builds wealth by:

• Reducing your overall debt.
• Lowering your revolving debt balances.
• Increasing your home’s value through home improvements.
• Helping you fund a business or education.

A personal loan reduces wealth if:

• Repaying eats into your savings.
• You use it to finance a want, not a need.
• It’s a bandage for bad spending habits.
• You don’t have a plan for what it’s for.

Should you use debt to build wealth?

Taking on debt involves taking on risk. Before borrowing money to make money, know how you’re going to use the loan and pay it off. To gauge whether you should use debt to build wealth, consider these rules:

• Your intended loan use should contribute to your wealth building, not hinder it.
• You should be in good financial standing and able to make your debt payments.
• The new loan shouldn’t cause you to live paycheck to paycheck.
• You shouldn’t take on more debt if you’ve struggled in the past.

To see where you stand, review your debt tolerance, behavior and intentions before you borrow money and put your finances at risk.

Good debt vs. bad debt

To build wealth with a personal loan or other type of debt, you must put it to good use. If you’re unsure whether your intended loan purpose is advantageous, consider good debt versus bad debt. Good debt is any type of credit that produces a financial return on your borrowed money, while bad debt is typically money you borrow for experiences, consumable goods or depreciating assets.

Debt-to-income ratio

You can calculate your DTI by dividing your monthly debt payments by your gross income (your earnings pre-tax). A higher DTI means that more of your income is going toward paying your debt. Adding another debt could stretch you thin and put you at higher risk of default.

Financial advisors often recommend keeping your DTI ratio to 36 percent or less — including the new debt you’re taking on. However, lenders can set their own DTI ratios, and some allow you to borrow up to 50 percent of your income. They may charge a higher interest rate for the added risk.

Residual income

Consider how much cash you have after paying your typical fixed and variable expenses every month. Your lifestyle may include eating out at restaurants, a long commute to work that eats up gas or braces or dance lessons for a child.

Will you have enough left after adding a loan payment to handle emergencies?

Don’t forget to consider your savings goals for retirement and education. Just because a lender approves you for a loan doesn’t mean that your money habits can afford it.

Bottom line

Personal loans can be a valuable tool for building wealth if used wisely. First, take a look at your financial situation and wealth-building plan so you can make responsible borrowing decisions that provide an ROI. Then, put the debt to good use by growing your business, equity, skills and/or credit score — whatever your financial goal may be — with a plan in place to uphold the financial obligations that come with borrowing money to make it.

How this queer money coach uses debt to fund a life of freedom

By carefully choosing business credit cards and leveraging the debt wisely, weighing both emotional and financial returns and committing to a lifestyle that aligns with their values, Charly Stoever has grown a coaching business without sacrificing their well-being.

Read on