Understanding the Emotional Side of Money

Here is a little thing they don't teach you in personal finance class: most of the decisions we make about our money are emotional rather than rational. Following the decisions of our youth, our parent's values and beliefs about money, and of course, the pang of anxiety as we lie in bed at 3 AM wondering if we are even doing this adulting thing right or wrong.

I have seen my friends obtain personal loans for countless reasons, but what is become obvious to me is that it is not about the loan itself, but the underlying reason. I often think about my college roommate who took out a $12,000 balance transfer personal loan to combine her credit card debt, which had accumulated during a nasty divorce. She cried the first time she made a $200 payment to the loan. Not because it hurt her budget, but because for the first time in two years she had a plan. That loan had nothing to do about the pending financial return, it was about establishing control when everything around her was dysfunctional.

I think of my cousin Jake who borrowed $8,000 to purchase DJ equipment because he watched entirely too many YouTube videos about the benefits of side-hustles. Six months after the purchase, the DJ equipment sat idle in his garage, and he continued to pay on the $8,000 loan.

Two people use the same financial instrument to address their financial objective, yet vastly different outcomes. Here is the point: before you even think about interest rates or payment terms, you have to understand your true underlying intention for borrowing. Are you solving an actual problem that has a beginning, middle, and end? Or are you purchasing what is likely a nebulous on your hope for something to work out? While the application for the loan doesn't prompt you to reflect on your intentions, there's nothing wrong with doing so.

The Mathematics of Freedom: Running the Numbers

You're going to take a practical moment. I am going to show you exactly how to determine whether a personal loan makes sense mathematically for you. So, get a calculator, a pencil, and maybe a cup of coffee. I think this is important.

Let's assume you have $18,000 of credit card debt distributed across four cards. The APRs, of course, range from 19.99% to 27.99% (that one card in college that you signed up for to get a free tee shirt has extremely predatory rates). Your minimum payments are roughly $540 a month. And the kicker is at that rate you are looking at 30+ years to pay it off with more than $40k in interest. Forty. Thousand. Dollars. That is a new vehicle. A college fund. All kinds of things you won't have because you're paying interest to the credit card company.

Now let's assume you qualify for a personal loan at 11% APR for $18,000 for five years. So your monthly payment would be $391. Yes, you are responsible for that payment for the next five years. But at the end of that commitment, you are free. You are free and paid approximately $5,500 in interest instead of $40,000.

But here's where people confuse the situation: they see $391 payment versus $540 minimum payment and say, "Great, I'm saving $149 a month!" That's the wrong way to think. That's not correct. That "$149" is not free money to spend on takeout and streaming services. That's the amount that you should throw at the loan instead of paying it off in five years; you would be saving a significant amount of money in interest.

This is the crux of the matter. Will you really be able to pay that amount each month? Will you just pay that much each month, vs really being committed to it? Being in charge of your financial situation is important, but if you still have to deal with the issue of which bill to pay when, a personal loan may not fix your problem but merely reorganize it.

The Regional Reality: Where You Live Matters More Than You Think

Here is something that doesn't get stated enough, personal finance looks a lot different in Des Moines vs San Francisco. $50,000 a year in rural Mississippi is likely a comfortable middle class life, $50,000 in Manhattan and you are one broken pipe away from bankruptcy.

Lenders know this. They care about your debt to income ratio, but they have never taken your Brooklyn rent of $2400 into consideration vs your sisters $800 rent for a bigger apartment in rural Oklahoma. They don't take into consideration that your groceries are 40% more, or that your car insurance is three times the national average because you live in a city where people are driving like they are trying out for a James Bond movie.

This shows that you need to be much more conservative than the calculator would lead you to be. If a lender agrees to lend you $20k with a monthly payment of $425, you should ask yourself if that payment will still be affordable if the landlord raises the rent $200 next year. In hot markets, that is not hypothetical; that is reality.

I have seen this happen poorly. A friend in Seattle borrowed some money. Everything in his credit report indicated he could afford the payment. The company decided everyone had to come back to the office, his daycare costs doubled, and gas and groceries went up. Any one of these did not break his budget, but one after another turned a comfortable payment into monthly stress. It was not the loan that was the problem. It was the lack of buffer.

The Lender's View: Seeing What Is on the Other Side of the Desk

Let's flip the tables for a minute. Put yourself in the lender's position. You are a business, and your product is money. You create profit from calculated risk. You lend money to people and charge interest. Each time you lend money you are betting that they will pay it back.

Once you understand this, it will make sense why someone with an 800 credit score is getting offered 7% while someone with a 630 is getting offered 18%. It is not personal, it is not a moral judgement, it is simply math. Statistics show that someone with a 630 is statistically much more likely to default than someone with an 800. The higher rate is the lender's safeguard against that risk.

This is, in part, why they are so concerned about your debt-to-income ratio. Having a good history of good credit is simply not enough. They have to feel confident that you are not already so thinly stretched that a month of bad news would send the whole house of cards tumbling. You'll find that if you're paying $2,800 on existing debt and you make $4,500 a month, adding on another payment of $300 a month is a problem waiting to happen. Denying you the loan is not mean—it is really them being honest with the two of you about a situation that both of you would find difficult.

For you, this perspective allows you to take on activities that shop smarter: When you are denied or offered a rate that feels insulting, it is not personal—it is data. Data you can improve upon. Maybe not today, maybe not next month, but over time you can absolutely change the story your credit report tells.

The Hidden Variables: What Else Affects Your Rate

Credit scores get all of the attention, but there are other factors impacting your rate.

The timing of your application matters. If you've applied for three credit cards in the last two months, that is a big red flag for a lender. It will infer you are either desperate and probably obnoxious or you simply didn't plan well. Each hard inquiry stays on your report for two years. While you can argue that its effect diminishes, a report with hard inquiries, whether new or old still says something. Having a history of recent hard inquiries on your report will say something about you: you are scrambling for credit.

Your employment stability is key. You have been at your job for five years? That's a plus. You've changed jobs three times in the last eighteen months? Even though each could show upward movement with a pay increase, it is still representing more uncertainty in their eyes. Lenders love boring, stable. The optimal borrower looks like someone who has been at a job for multiple years, has lived at the same address for multiple years and has a stable predictable financial life. While it makes for great conversation at parties to speak about exciting career changes or opportunities in entrepreneurship, it makes lenders nervous when looking at past stability.

Your stated purposes of the loan might affect your odds of approval. Debt consolidation sounds nice to a lender, showing you are thinking about your loans. Wedding expenses or vacation could raise an eyebrow or two. In fact, as a loan officer, there are loan purposes that some lenders will not even lend to. This does not mean you should ever lie on a loan application, please just never lie on a loan application, but know that your intent of purpose is evaluated.

Your relationship with a bank could also help sway a loan application. If you are applying to a bank at which you also have a checking and savings account for ten years, have never bounced a check, but have healthy balances all speak to social proof, because they can actually see your transaction history. They see when you are not living on overdrafts and payday loans. In some cases, this will tip the scales in your favor in borderline applications.

The Invisible World of Loan Origination Fees: Reading Between the Lines

Let's talk about origination fees, because this is where a lot of people quietly get fleeced. An origination fee is simply the lenders cost of getting your loan processed and approved, upfront. Usually ranging anywhere from 1-8% of the loan amount, here's the catch: it is a part of what you receive, but you're still responsible for the full amount.

Say you take out a $10,000 loan which has a 5% origination fee. So, the lender gives you $9,500. You must pay interest however, on the full $10,000 amount you owe to the lender. It's like paying a cover charge at a bar, except the cover charge doesn't go toward your drinks.

Unfortunately, origination fees aren't always bad, either. A lender with a 3% origination fee and a 9% interest rate is still a better deal than a lender with no origination fee but a 12% interest rate. This is also why you have to look at APR's and comparisons, not interest rates. Once again, the origination fee is baked into the APR which represents the true cost comparison.

But here's the piece that no one really ever talks about: origination fees can sometimes be negotiated, especially if you have good credit. Not all lenders will negotiate, but it is always worth asking - especially because online lenders operate in a more competitive space. The very worst they can say is no.

Also, if you auto pay the lender, or if you're an existing customer, look if the lender waives the origination fee. This is sometimes offered, and is something worth maximizing as well. Saving a few hundred dollars may seem small, but adds up quickly!

The Three-Bucket Strategy: A Framework for Any Loan Decisions

Over the years I have devised what I call the Three-Bucket Test, which at its core, is for evaluating any loan. This has been useful for me, and it's also helped friends think their way out of some truly bad decisions.

Bucket One: The Math Bucket. This is just cold, hard numbers. Does this loan save you money versus where you are now? Can you afford the payment and still have a buffer of $500 in your monthly budget? If you pay off the loan early, does that create constraints for you? If the numbers don't work, nothing else matters. You can't borrow your way out of a math problem.

Bucket Two: The Behavior Bucket. This is the honest zone. Let's say you are consolidating credit card debt. Do you have the discipline to not run those cards back up? If you are borrowing for home improvement, are you the kind of person that actually will finish the project, or will it go to the graveyard of half-finished projects? The best predictor of your future behavior is your past behavior. If you have refinanced credit card debt in the past and ended up back in the same hole, the personal loan is not the solution—addressing spending is the solution.

Bucket Three: The Life Bucket. This is about context and timing. Let's assume the math worked and you believe in your own discipline, but let's also assume you are 6 months pregnant, planning a cross-country move, and your industry is laying off workers. Is this really a time to be adding a new financial obligation? Sometimes the answer is yes, because this is a need. But maybe the wiser answer is to wait.

All three of these buckets need to point shape. Two out of three is not good enough.

The Refi Shuffle: When Your First Loan Is Not Your Last

This is a move that sophisticated borrowers use: the loan refinance. Let's say you borrowed a personal loan two years ago when your credit score was 660 and you received an APR of 15%. You have made every payment on time, you paid off a car loan during this time, and your credit score is at 740. The original 15% loan should not be your only option on that loan forever.

You can refinance this loan with a new lender at a better rate. What this means is you will take out a new loan for the same amount of your original loan to pay off the older loan. If you can refinance out of that loan from 15% down to 9%, you will save thousand of dollars over the remaining loan term.

Make sure to do the math. If the original loan that you refinanced had a 5% origination fee and the second loan has a 5%, you just doubled your origination. Make sure the savings associated with the loan is worth to you the new origination fee. Take a loan calculator for a trial run to compare both scenarios.

Most people don't know this option even exists until it is time to sign papers. Most people think they are locked into that loan until it's paid off. That person is not in prison. If your credit is getting better, you will have refinancing options.

When Life Happens: Dealing with Payment Hardship

Let's talk about the thing nobody wants to think about: what if you can't make a payment?

First, the absolute worst thing you can do is ignore it. The ostrich approach—burying your head in the sand and hoping the problem disappears—will only make things catastrophically worse. A missed payment reported to credit bureaus tanks your score. Multiple missed payments lead to default, collections, possible legal action, and years of damaged credit.

The moment you realize you're going to have trouble making a payment, contact your lender. Immediately. Not after you miss the payment—before.

Most lenders have hardship programs. They might be able to defer a payment, reduce your payment temporarily, or work out a modified payment plan. Why would they do this? Because it's cheaper and easier for them than chasing you through collections. They want their money, and they'd prefer to get it through cooperation rather than conflict.

I watched my brother go through this. He took out a personal loan to consolidate debt, and then eight months in, his company downsized and his hours got cut. He was terrified, embarrassed, didn't want to admit he couldn't handle it. I finally convinced him to call the lender. They put him on a three-month reduced payment plan that gave him breathing room to find additional work. His credit didn't take a hit because he didn't miss any payments—he just made modified payments that were approved in advance.

Communication and honesty are the answers. Lenders aren't the bad guys. They are business organizations who understand stuff happens. But you must communicate first.

The Psychological Win: Small Victories in a Long Game

Here is something that does not show up on any spreadsheet, but may be even more important: momentum.

When buried in debt, the psychological burden can often feel as heavy - or heavier than - the financial burden. Every statement you receive that shows modest progress is a crushing defeat. This is where the structure of a personal loan can often be truly therapeutic. Because your payment will remain the same month to month and you can see an actual countdown, month after month: You are actually making progress. You are not just maintaining status — you are making progress towards the shore.

I will never forget the first personal loan I ever paid off — a loan I took out for car repairs. Honestly, that last payment was made on a Tuesday morning; I had paid my loan payment of $218 each month, for three years! When I logged in to see my balance was zero; I cried a little bit! It was not about the $218 — at that point I was making decent money! It was about the principle. I had committed to something, I made the payment every month, and I was done. That sense of completion feels exhilarating!

If you are someone who struggles with motivation, use the payoff loan as a distinct goal. Place a chart on your fridge. And every month check the boxes. Watch that principal drop. These little motivational victories will reinforce positive behaviors in a way the builds over time.

The Dark Side No One Talks About: How Loans Become Quicksand

I wouldn't be doing you any favors if I didn't talk about when personal loans go wrong. Really wrong. I mean not "this is a little inconvenient" but "this fundamentally changed my life."

My neighbor Tom is a cautionary tale that keeps me up some nights. Smart guy, decent job in IT, makes about $75K a year. He decided to take out a personal loan for $15,000 at 13% to consolidate some credit card debt. Classic move. Exactly what the financial dude recommends.

What he does not tell you is that consolidating debt does not cure the disease that created the debt in the first place. Tom paid off the credit cards, felt the relief, and then slowly but surely prospectively began to use them again. Just for emergencies at first. Then for things that felt like emergencies but actually weren't. A new laptop because the old one was slow. Plane tickets home for a funeral. Car repair because we didn't have a choice. Reasonable stuff. Life stuff.

But in eighteen months, he had $8,000 back on those cards. So now he has the personal loan payment along with the credit card payments. His debts did not consolidate. It multiplied.

And this is the trap that catches more people than any bad actor in lending ever could. The loan itself works fine. The math is fine. But if you're using borrowed money to treat the symptoms instead of addressing the original condition, you are now building a house on sand. At some point, the house crumbles.

I'm not sharing this to discourage you. I'm sharing this because the personal finance industry sells the idea as being so neat and orderly. Get a loan, pay off the debt, and live happily ever after. Unfortunately, humans are not neat and orderly. Humans are emotional. We make the same mistakes a second time because that time we convince ourselves, "This time is different."

Sometimes the bravest thing you can say to do is look at a personal loan offer and simply say, "I am not ready for this yet."

The Shopping Game: How to Actually Compare Lenders

The lending market is effectively the wild west for financial products. You have traditional banks, credit unions, lenders only available online, peer-to-peer platforms, and fintech start-ups with names that sound like a rejected Pokeman and everything in between. Shopping for a personal loan should be simple, but it is intentionally complicated because profiteering from the confusion is profitable.

Here is how you actually do this, without losing your mind.

First, understand that you will see the term, "pre-qualification," discussed. This type of pre-qualification is defined as a soft credit inquiry and will give you an estimate of what you will qualify for without affecting your credit score. Think of it like a financial equivalent of window shopping. You can (and should!) get pre-qualified from several lenders - I'm talking to five, six, maybe even ten lenders - cast a wide net!

However, here is the thing that no one explained well - pre-qualification is not approval. After you have made the decision to move forward with a lender, you then go through the actual application process and get a hard credit inquiry - THAT one does affect your credit score. The positive news is that if you apply for multiple loans over a 14-45 day time span (may depend on the scoring model), they normally count as one inquiry. The system knows you're rate-shopping... not - begging everybody for money.

By the way, credit unions are unique because they are the weird cousins of lenders, as a compliment! All credit unions are not-for-profit, which means they are not trying to squeeze every last dollar out of a transaction and typically have better rates and terms that are more forgiving. However, you need to be a member - and membership predicates different qualifications. Some credit unions have membership based on where you live, where you work, or what organizations you belong. It is worth the hour or so of research, on credit unions you may qualify to join. I have seen rate differences of three or four percentage points on the exact same borrower profile between a credit union and a bricks-and-mortar bank!

Online lenders move quickly, sometimes too quickly. Some can approve and fund the SAME DAY and many within 24-48 hours! There is a positive and negative side to fast service. It is great when you genuinely need some funds quickly for a real issue; it may not be a good idea if you are making a decision based on emotions and have not properly thought things through. Just because you can get your funds today - you may not want to.

Cosigner Question: Bringing Someone Else into Your Mess

Now, let's talk about cosigners because this is tricky territory. A co-signer is someone who agrees to legally be responsible for your loan in case you don't make payments. This is usually the way those with limited credit history or lower credit scores obtain a better rate for their loan. Your parents co-sign, your credit score gets treated as if it is their score, and all of a sudden you qualify for the 8% rate instead of 16%. Sounds good, right? Everyone wins?

Not so fast.

Here is the part that doesn't usually come up until it is too late. Asking someone to co-sign is not asking them to vouch for you. It is asking them to possibly pay your debt. Missing a payment damages their credit. Defaulting on the loan puts them on the hook for the entire amount. And even if you die—and I hate to put it that way, but this happens—they inherit your debt.

I saw this ruin a close relationship with my friend, Marcus, and his dad. Marcus convinced his dad to co-sign a 10,000 dollar loan. Everything was fine for nearly 8 months. However; Marcus lost his job. Due to pride and embarrassment, he did not tell his dad immediately. He missed one payment...then another. By the time, his dad found out—because the financing company contacted him—Marcus was two months delinquent, and his dad's credit dropped 165 points! While everything eventually got settled, the trust? Took years.

While it is not easy, before you ask someone to co-sign, you need to have an honest conversation with yourself first. Instead of asking "can I afford this payment?," ask yourself instead "if my life goes to hell, can I still make this payment?" If the answer is "no," you should reconsider asking anyone else to take the burden of that loan on, no matter how much they may love you.

And what if someone wanted you to co-sign? Proceed with caution. Love is love, and money is money. The two do not always co-exist easily, and there is no shame in saying no.

The Prepayment Penalty Surprise

Here is a fun little surprise that some lenders are hiding in the fine print: pre-payment penalties. Crazy, right? You would think that lenders would be happy if you paid off your loan early. Less risk for them, clean up their books, happiness is multiplied creating a win-win.

But then again, someone is getting paid for the risk in the form of interest. If I pay off a five-year loan in two years, the lender has earned two years of interest instead of five years. Some lenders may not appreciate seeing the avoided income of interest income.

A pre-payment penalty is a fee that is charged to borrowers for the privilege of paying off debt. It may be a flat-fee, such as $250. It may be a percentage of the remaining balance on opened loan. It also may be a calculation that derives from how much interest the lender expected to collect on the loan based over the remaining life the loan. Those pre-payment penalties vary widely and could easily be worth thousands of dollars, which is the opposite of the value and benefit of forgiving the debt early.

Several lenders do not have prepayment penalties and in some states, such as for some home mortgages, they simply are not permissible. Just make sure you ask about this before you sign anything. Read the loan agreement. If there's a prepayment penalty clause, think about whether you're okay with it. If you're the type of person that's going to throw extra money at the loan at every opportunity—maybe you get an annual bonus or expect a big chunk of money when you sell your house—a prepayment penalty is going to cost you a lot of money.

Here's the play: some lenders will negotiate about this. They want your business. If you have two similar options on the table, one of them has a prepayment penalty and the other doesn't, let the lender know. They may remove the prepayment penalty to earn your business. They might not, either way, you've got a better idea of what is going on.

The Avalanche Vs. Snowball Debate: How Do You Actually Pay This Thing Off?

Now that you know about this loan, the clock is ticking. You've got this loan with a monthly payment, and you're going to need a strategy for more than just the minimum payment. There are two popular approaches, and people get oddly tribal about which one is "correct."

The Avalanche method says prioritize the highest interest rate first. Let's say you have a personal loan with an 11% interest rate, and a credit card with a 22% interest rate- focus every additional dollar on that credit card, while making minimum payments on all of the other debts. A prepayment penalty will financially hurdle you, obviously, but once you pay down the credit card, move to the next highest debt. The Avalanche method is mathematically optimal: you pay less interest, overall, and the debt goes away faster.

The snowball method says forget about the math and think about psychology: pay off the smallest amount with the least amount of interest first. Achieve that quick win. Experience the thrill of paying off an account. Create momentum. Leverage that natural high to pay off the next smallest debt. This is a slower and costlier methodology because of the interest charges, but it works well for people who need to experience victory before losing the motivation to pay off debt.

Which option is correct? The one you will actually follow through on. I've seen people hit a wall with the avalanche method because paying an extra $200 towards a $15,000 balance seems pointless and doesn't move the needle at all. People lose motivation and stop making extra payments altogether. While meanwhile, someone can pay off 3 small debts in a year using the snowball method, feel like a rockstar, and ride that high all the way to completing debt repayment.

I would also like to mention there is a blend of these two options that nobody discusses and should be considered for your overall debt repayment strategy: emotional avalanche. This is where you look at the debt overall, any debt you have, and say to yourself: "What debt makes me feel the most stressed?" This debt isn't necessarily your highest rate, your lowest balance, or largest balance; however, it is the one that keeps you up at night. Maybe it's a loan from a family member. Maybe it's a credit card from a time in your life when you were not in the best place mentally, emotionally, or financially. In that case, this specific balance should be your first debt victory. The psychological relief could be worth more than the best mathematical outcome.

The Emergency Fund Dilemma: Be In Debt And Have Savings?

This is where the personal finance community splits into rival sides. On one side, the argument is: Take every dollar you can get and apply it to the high-interest debt because technically, you have an emergency surrounding debt. The other camp says that it's a requirement to build at least a small emergency fund first; the reason being that the next unexpected expense will push you further into debt.

They are both right, and they are both wrong. Here is why: if you have zero emergency savings, and you are aggressively paying off debt, what happens when your car needs an $800 repair? You cannot pay it. So you charge it to your credit card, and now you have just eliminated all the debt payoff progress you made. The debt you paid off has now just become new debt.

If, instead, you are carefully building a six-month emergency fund, while you carry credit card debt at 24%, then you are paying thousands of dollars in unnecessary interest. Each month that money is sitting in your savings account earning one half percent (0.5%), and you carry debt at 24%, is a month that you are going backwards.

The compromise that actually works for most people is what I call a starter fund. Prior to attacking your debt with extreme aggression, build an emergency fund of $1,000-$1,500. That is enough to address most common emergencies -- car problems, medical copays, emergency home-repairs, etc. -- without derailing your debt payoff. It is not enough to live on if you lose your job for months -- and that's fine. That is not its purpose. It's for keeping the wheels on the bus while you take on the bigger problem.

Once you've paid off or at least whittled down those debts, you build the full three-to-six-month emergency savings. To do these things at the same time would be like digging yourself out of a hole while someone is filling it back in while you are doing it. You must stop the bleeding first.

The Final Word: You Are Not Your Debt

I want to close out with something important—something that goes beyond APRs, debt-to-income ratios, and all the miserable calculations that come with managing debt.

If you're reading this because you're in debt, you're struggling, you feel like you raised your hand and made some mistakes, and now you're paying for those mistakes (literally) then you need to know this—you are not your debt.

You are worth more than a credit score. If you are here doing the research, trying to understand your options and determining what the right decision would be, then you are already ahead of yesterday's you.

Remember debt is like a spare tire; it is real but it isn't permanent. It is a situation that has some solutions. Sometimes those solutions take time. Sometimes they ask for sacrifice and discipline. Sometimes they ask for help. Sometimes they are more than one answer. They exist.

The personal loan is simply one tool. It might be right for you in the moment, or it might not be right at all. Who cares? What is most important is that you are able to critically think about what the right decision is for you in your situation. It doesn't matter what the advertisement says you should want, what your neighbor down the street did, or what sounds smart or good in theory.

Your story is your story! Just be intentional with it for the next chapter.