Borrowing money can be costly, but sometimes it’s necessary. The good news is there are many ways to borrow money, though some of them are more costly than others.
“For the American consumer the choices are almost endless, but it often comes down to the basics,” says Angelo DeCandia, professor of business at Touro University. “Do you want a secured or unsecured loan? Do you prefer an installment loan or revolving credit?” And, of course, you have to consider the interest rate.
Here are some ways to borrow money, along with their pros and cons.
[Read: Best Personal Loans.]
In December 2022, TransUnion projected that 19.3 million Americans would use a personal loan to borrow money in 2023.
Part of the appeal of personal loans is they can be used for nearly any purpose, but that flexibility can be risky. “When used for home repairs or emergency medical bills, they are a responsible form of debt,” DeCandia says. But using a personal loan for a big vacation may not be the best idea.
“In most cases, borrowing money for something that won’t be there when the payments stop is probably not the best use of any kind of loan,” he says. “When you make that last payment, there should be something to show for it — not some far-off memory.”
You can get a personal loan from a traditional bank, credit union, online lender or peer-to-peer lender. Qualification requirements, interest rates and fees will vary by lender. For this reason, it’s a good idea to look at multiple lenders before borrowing, says Alan Fletcher, partner at Lift Financial in South Jordan, Utah.
Personal loans are convenient because they are usually unsecured, meaning you won’t need to put up collateral like your home or car. Instead, the lender will review your credit history and financial situation to determine if you’re a creditworthy borrower, Fletcher says.
This can make personal loans out of reach for borrowers with poor or minimal credit, as many lenders require a credit score of at least 600 and some may look for a minimum number of years of credit history. You may also need to meet certain income and employment requirements to qualify.
Personal loans may carry fees including origination fees, late fees and early repayment fees.
— Typically don’t require collateral.
— Can be used for nearly any purpose.
— Must meet lender’s credit requirements.
— Possible income and employment requirements.
— May have fees.
Buying something with a credit card is essentially a form of very short-term borrowing. You get the item today, but have until your next credit card bill’s due date to repay it.
Some credit cards offer introductory 0% APRs, which means you won’t owe interest on purchases and possibly balance transfers during a set period, such as 12 or 18 months. You will still need to at least make minimum payments during this period. After that, failure to pay your full balance by the due date will result in charges at the APR stated in your card’s terms and conditions.
If you want to use your credit card to access cash, you’ll need to get a credit card cash advance. Most credit cards offer this option, DeCandia says, “but keep in mind credit cards often have high interest rates, so it’s important to know the costs of borrowing and whether or not you can repay it within a reasonable time.”
Cash advance APRs are generally higher than purchase APRs and often come with an additional fee, such as 5% of the advance. They are also often limited to a percentage of your overall credit limit. You can usually get a cash advance through an ATM, at a bank or online from the credit card issuer. It may also be possible to have your card issuer send you convenience checks.
— No interest charges if you pay your full balance by the due date.
— Can have a high interest rate.
— Cash advances are expensive.
[Read: Best Credit Cards.]
Home Equity Loans or Lines of Credit
If you have equity in your home, you may be able to tap that for extra cash through a home equity loan or home equity line of credit. Both loan types involve using your home as collateral, but they offer different structures.
A home equity loan usually provides a lump sum equal to a percentage of your home’s appraised value less what you still owe on your mortgage. Then you need to repay it plus interest based on a fixed interest rate.
A home equity line of credit, or HELOC, is a revolving line of credit you can draw from much like a credit card. You can borrow money during a set time called the draw period. During that period, typically 10 years, you will only need to make interest payments. After that, you’ll enter a repayment period, which is typically 20 years long.
“Keep in mind, a HELOC is almost always an adjustable interest rate (that changes) monthly,” Fletcher says. This rate is generally lower than the APR on credit cards, however.
Using your home — which is many people’s largest asset — as collateral can seem like a convenient way to access cash, but be warned: If you don’t repay your loan, the lender can foreclose on your home. You may also need to repay the loan or line of credit when you sell your home. There may also be fees, such as an appraisal fee, application fee and closing costs.
— HELOCs and home equity loans let you access the equity in your home.
— Could charge lower interest rates than credit cards and personal loans.
— Can lose your home if you default.
— May charge fees.
Personal Lines of Credit
A personal line of credit is an unsecured borrowing option that you can tap up to a credit limit. You can write checks against it or transfer money to your checking account
You’ll also receive a monthly bill for your outstanding balance and need to make at least a minimum monthly payment toward that amount. You may also pay a fee each time you use your personal line of credit. You’ll only pay interest on the amount you borrow from your line of credit. These interest rates vary by institution, but can be higher than secured loans, such as HELOCs.
You can get a personal line of credit from a bank or credit union, though you may need to have strong credit and a checking account with that institution to qualify, and personal lines of credit are not as commonly offered as personal loans. The amount you can borrow can vary by lender.
— Only pay interest on what you borrow.
— Typically need good to excellent credit to qualify.
— Can have higher interest rates than secured loan options.
— May charge fees.
You may be able to borrow money from yourself through a 401(k) loan. This is not the same as taking a 401(k) early withdrawal, which will require you to pay taxes and potentially a 10% early withdrawal penalty if you’re under age 59 1/2. Instead, a 401(k) loan lets you take cash out to use now, but you will have to repay the funds, plus interest, at a future date.
401(k) loans can be convenient and let you bypass the credit score requirements of other loan options, but they can also be like robbing your future self to accommodate your present self. Any money you take out of your 401(k) becomes an obligation instead of an asset: You now owe interest on it rather than having it earn interest for you.
If you don’t repay your loan according to its terms, any outstanding balance will be considered a distribution from your 401(k) and subject to taxes and penalties. Any unpaid amount also means you’ll have less money come retirement.
You usually have five years to repay the loan, during which time you’ll be required to make regular payments at least quarterly. The exception to this rule is if you use a 401(k) loan to purchase a primary residence, in which case you may have more than five years to repay the loan. Note that your employer may require you to repay the full balance before leaving the company or else consider any outstanding balance to be a distribution.
If your plan allows for such loans, you can usually take out up to 50% of your vested balance or $50,000, whichever is less. If your vested balance is less than $10,000, you may be able to borrow up to $10,000.
Not all employers offer 401(k) loans, so check with your benefits department or your Summary Plan Description — a document that describes your plan’s rights and benefits — to see if yours does.
— No credit score requirements.
— Allows five years or more to repay the loan.
— Low interest rate.
— The maximum amount to borrow is the lesser of 50% of your vested balance or $50,000.
— Can reduce your nest egg.
— Not all plans offer loans.
Buy Now, Pay Later
Buy now, pay later, or BNPL, is a relatively new way to borrow money. Between 2019 and 2021, the number of BNPL loans consumers took out increased by almost 10-fold in the U.S., according to the Consumer Financial Protection Bureau. You’re most likely to find BNPL plans offered at checkout at various retailers through fintech providers such as Klarna and Afterpay.
With a BNPL plan, you can buy a product now and pay for it through installments, often with zero interest and no hard credit check. For a BNPL plan with four or fewer payments, the loan amount is often low, averaging about $135 over six weeks, the CFPB reported in March 2023.
BNPL may seem like a great way to get what you want even if you can’t afford it right now, but there is a catch: If you don’t make payments on time, you could incur late fees. These fees can add up to make BNPL more expensive than carrying a credit card balance. You could also run into overdraft or insufficient funds charges if you don’t have the money in your bank account to make payments.
— No interest.
— No hard credit check.
— Lets you pay for your purchase in installments.
— Usually only for smaller amounts.
— Can incur late fees if you don’t pay on time.
— May lead to overdraft or insufficient funds fees from your bank.
How to Borrow Money Responsibly
“Before borrowing money in any way, it is important to take into account your financial situation and evaluate your ability to repay any borrowed funds,” Fletcher says. Failing to repay your loans could cost you in interest, fees and dings on your credit history.
It’s also important to know the particulars of any product you’re using to borrow money. “Ensure you understand terms and conditions, interest rates — (including) if they are variable or not — repayment periods and/or penalties and any other additional fees before borrowing,” Fletcher says.
He also advises comparing multiple lenders and lending options before borrowing money to ensure you find the right one for your needs.
Lending Products to Avoid
There are many other ways to borrow money than the ones listed in this article. While some may be worth considering, there are also ones to avoid. These generally come with exorbitant costs and can be predatory in nature. Just because a loan is easy to get, doesn’t mean you should use it. Risky lending products include the following:
Payday loans are small, short-term loans that are typically due on your next payday. They usually require no collateral or credit checks, making them tempting avenues for quick access to cash. Except for the fact that they can have fees that equate to APRs of nearly 400%, according to the CFPB.
These loans can be so prone to predatory practices that some states, such as New York, don’t allow them.
“Not only are these loans high interest with high fees, but the need for them is a sign that spending is way out of control,” DeCandia says. “Living paycheck to paycheck is hardly the ideal way to manage your finances, but when you can’t even make it to the next payday without a loan, well, then everything must stop.”
In addition to payday loans, Fletcher says to avoid car title loans, which come with high APRs and the risk of losing your vehicle if you can’t repay your loan.
With a car title loan, you use your vehicle as collateral by giving the lender the title. You won’t get it back until you repay the loan. Translation: If you don’t repay, you never get your title back.
Car title loans are often for no more than 30 days and let you borrow 25% to 50% of your vehicle’s value. However, they come with high fees that can equate to around a 300% APR, according to the Federal Trade Commission.
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