Dave Ramsey Says Taking on This Type of Debt Is ‘Like Trying to Bail Yourself Out of a Sinking Boat With a Bucket Full of Holes.’ Is He Right?

Is the finance guru off base on this issue?

If you're familiar with finance expert Dave Ramsey, you probably already know he is not a fan of borrowing. In fact, he suggests avoiding most types of financing. And, there's one particular kind of debt he has said not to take on because it's "like trying to bail yourself out of a sinking boat with a bucket full of holes."

What's the debt he's talking about -- and is he right to recommend avoiding it?

Dave Ramsey is against personal loans

On his blog, Ramsey explained the common reasons why people get personal loans: consolidating debt at a lower interest rate; building credit; and buying things you cannot afford to pay for outright. And he said none of these reasons are valid ones for borrowing.

"We know it may seem like taking out a loan will help you get ahead or even just offer some relief in the middle of a crisis," Ramsey said. "But trust us, loans only leave you several steps behind where you started."

Ramsey warned it can be a "lot of work" to take out a personal loan, only to "get absolutely nowhere." And he cautioned that "The weight of personal loans (plus the interest that’s automatically tacked on) keeps you from making real progress with your money." He also suggested that if take out a personal loan, you could get trapped in debt for life so you should just say no.

Is Ramsey right?

Ramsey is spot on that certain kinds of debt, such as store credit cards and installment loans, are bad news. But when it comes to personal loans, he is way off base.

First, personal loans won't trap you in debt because, unlike credit cards, which allow you to keep charging on them as you pay down your balance, personal loans don't work that way. You borrow a set amount of money and you have a limited period of time to pay it back. This is a huge benefit of using a personal loan to repay credit card debt since you can get on a set schedule and know exactly when you are going to be debt free.

Second, personal loans can have much lower interest rates than most other kinds of debt such as credit cards and payday loans. As a result, using them to consolidate and pay off debt can make it much easier and more affordable to repay what you owe. If you can repay multiple other debts with a personal loan at a lower rate, there's absolutely no reason not to do that as long as you can count on yourself not to charge up your credit cards again once you've refinanced them into the personal loan.

There are also some circumstances where you really just have no choice but to borrow. While Ramsey says you can avoid doing so by saving up for what you want and living on a budget, it takes time to do that. If you don't yet have an emergency fund saved and an essential purchase you can't afford creeps up, a personal loan could be one of the cheapest ways to borrow to pay for it.

The bottom line is, taking out a personal loan is nothing like using a faulty bucket to try to save yourself. It's a very good tool to use in certain circumstances and not one to shy away from at all.