DebtHammer Newsletter #7: The Tools You Need to Become Debt-Free

Since Bitcoin was first introduced to the market in 2009, cryptocurrency has soared in popularity amongst investors for numerous reasons.

For one thing, cryptocurrency has massive potential when it comes to gains. According to Forbes, Bitcoin was worth $19,400 as of July 2022. In comparison, it was valued at $500 in 2016 — that’s a 3,780% increase. That sounds like tremendous growth, until you consider that Bitcoin was worth $61,374 in October 2021. People who bought in last fall are currently riding out a pretty big downturn.

Bitcoin isn’t the only cryptocurrency to experience such exponential growth or wild price fluctuations. Others, like Ethereum and Dogecoin, have also seen massive growth — and subsequent downturns — since their respective launches.

Besides the growth potential, the value of cryptocurrency is less likely to become diluted by inflation than other types of investments. For more aggressive investors, this makes it a solid investment opportunity — and a great way to diversify their portfolio.

Then there’s the fact that cryptocurrency is easier to access and liquidate than other types of investments. It’s also widely accepted by many merchants around the world, including Apple Pay and Google Pay.

As cryptocurrency continues to become more accessible and potentially profitable, more bullish investors have jumped on the opportunity to buy it in hopes of seeing a high return on investment.

If you’re interested in investing in cryptocurrency but don’t have the cash on hand, it might be tempting to use a loan to buy it. After all, many lenders offer personal and short-term loans that can be used for this purpose. A few lenders, such as BlockFi, even offer cryptocurrency-backed loans which let you use your existing cryptocurrency as collateral to buy more.

While some borrowers do experience a high return on investment, this is not the norm. Many people who use a loan to buy cryptocurrency end up with more debt than they can handle and risk defaulting on payments.

So, why is this?

In large part, it’s because the crypto markets are not well-regulated. They can experience major shifts in value due to external factors such as new regulations, competing cryptocurrencies, and social influencing. This makes cryptocurrency highly volatile — and risky — for casual investors looking to get ahead.

Plus, there are thousands of smaller cryptocurrencies on the market, so it’s hard to reliably choose a good one. Investing in one of these may result in small, short-term gains, but the massive fluctuations in value make them a poor long-term investment. Because of this, using a loan to purchase crypto is considered as risky as using one to gamble. You could win big, or you could lose thousands of dollars.

How you choose to fund your investments is ultimately up to you. However, using a loan to buy any investment, especially cryptocurrency, is highly risky and does not guarantee a return on investment. Even the slightest change in the market could mean a potentially devastating loss.

As a general rule, if you can’t afford an investment without a loan, it’s better not to buy it. That way, if the asset’s value does drop, you won’t end up with costly debt.

If you really want to invest some money in crypto, consider a platform like Acorns, which “rounds-up” your credit card and debit card purchases to the nearest dollar and invests the money on your behalf. Acorns allows you to allocate a certain percentage of your investments into cryptocurrency, and because you’re investing in small increments, you won’t be as exposed to risk from day-to-day fluctuations.

Survey: 21% of crypto-investors use a loan to cover their investments

Debthammer’s recent survey on cryptocurrency found that 21% of crypto-investors use a loan to buy crypto. While personal loans are the most popular choice, many people use payday loans, mortgage refinances, and even leftover student loan funds to fund the purchase.

According to the survey, around 27% of people felt they were at risk of vehicle repossession, foreclosure, or eviction due to using loans to buy cryptocurrency. Nearly 5% of crypto-investors experienced losses of at least $100,000, while fewer than 1% said they made that much or more.

Experts caution against this.

“Never take a loan to invest. Only invest money you have to spare,” says Dr. Merav Ozair, blockchain expert and fintech professor at Rutgers Business School. “A lot of people think they can become a millionaire in a day,” she says, “which never happens.”

Casual cryptocurrency investors face several roadblocks, including market manipulation from experts and social media influencers. For example, countless Reddit posts advise potential investors to borrow money to buy cryptocurrency.

“As a retail investor, you are at a disadvantage in crypto markets,” says Robert Geoghegan, author of A to Z of Web3: Teach children about the technology behind NFTs, the metaverse, virtual reality, blockchain and cryptocurrency. “The lack of crypto regulation means markets are susceptible to market manipulation, such as ‘pump and dump’ schemes and social manipulation,” like influencers telling their followers to purchase a specific coin.

For more recent findings, check out the survey on cryptocurrency.

In other news: What will that loan really cost?

According to Experian, around 22% of Americans had a personal loan last year. Reasons for this vary — from debt consolidation to home renovations to big-ticket purchases. But one thing’s for sure: Not everybody is prepared for the full cost of paying back what they borrow.

The biggest reason for this is that most loans come with additional, easy-to-miss fees. This includes late payment fees, prepayment penalties, and accrued interest. These extra costs can add up and, in some cases, make it more difficult to keep up with the loan.

Fortunately, there are ways to calculate how much your new loan will cost before you get it. One option is to use an online calculator. With one, you can run some numbers — specifically the principal balance, the annual percentage rate (APR), the length of the loan, and the monthly payment. This will give you an idea of the total payoff amount, but it might not be exact. After all, calculators don’t typically account for things like late or prepayment penalties.

If you already have a loan, request a loan payoff statement from your lender. This is a statement that indicates the amount needed to pay off the loan in full. This includes things like interest and any extra lender’s fees. Generally, the payoff amount will be higher than what was listed on your last statement, so keep this in mind.

If your loan doesn’t come with a prepayment penalty and you can afford it, try to make higher monthly payments. Not only will this help you pay it off sooner, but it can also save you a lot of money in interest.

Ready to start building credit?

Your credit score plays a major role in many facets of life — from applying for a loan or a line of credit to renting a home. Whether you’re new to credit or looking to get back on track, you’re in luck. There are quite a few ways to go about it, and not all of them involve using a credit card.

One popular way to build credit is to become an authorized user on someone else’s account. Another option is to sign for a free service that reports nontraditional payments, like rent or utilities, to the credit bureaus. Or you could get a credit-builder loan, a type of reverse loan that lets you establish credit without taking on debt.

Whatever method you choose, it’s a good idea to start early. After all, building credit takes time and persistence. The sooner you begin, the sooner you’ll be ready if a prospective lender, landlord, or even employer needs to run your credit.

Coming next month: What you need to know if you’re thinking about buying a mobile or manufactured home.

Scroll to Top