Best ways to borrow money
Beyond personal gifts or grants, there aren’t many ways to access funds without paying a price. Borrowing money will always mean repaying the loan with interest, and lenders are quick to penalize if you ever fall behind. Depending on the type of loan you chose, certain arrangements might suit you better than others.
Certainly, mortgages and auto loans are the more common ways of financing a purchase, while high-interest credit cards offer convenience but can wind up costing a bundle down the line. If you need a personal loan to get through some short-term financial hardship, there are plenty of cost-effective ways to borrow money. Let’s take a look at some popular financing options and see which could be the best fit:
- Personal loans
- 401(k) loans
- Credit cards
- Cash advance from credit cards
If you’re looking to make a large purchase but lack the capital to make it happen, a personal loan might come in handy. These loans involve handing funds over in one lump sum, which is paid off over time in installments.
Unlike other types of financing, personal loans aren’t limited in what they can be used for. Funds from home loans, for example, can only be used to secure property. Additionally, student loans can only go toward tuition. By allowing you some flexibility, personal loans can be used to pay a wide variety of expenses.
Medical bills, existing debts, home renovations and more can all be financed through this means of borrowing money. While they can be used for most purchases, most borrowers will use personal loans to add value to an existing asset. Using one for a home renovation, for example, would add value to your home and expand the equity you already own.
When you apply for a personal loan, you’ll request a specific amount from a lender. The lender will decide whether you qualify based on all the usual factors, such as a review of your credit report, debt history and available money in the bank.
If you need funds for a short-term, emergency situation, taking out a loan from your existing 401(k) account might be your best resource. As long as you can keep up with the repayment plan, committing to this type of financing offers a flexible and convenient option.
The recent COVID-19 pandemic left lots of people with an interrupted source of income. In order to cover their expenses for the foreseeable future, many turned to their 401(k) for a little help.
This type of funding isn’t technically a loan, since you’re borrowing your own money and paying it back to yourself. Interest rates on these financing plans typically follow the prime rate, a standard used by lenders to gauge appropriate interest rates for their products.
The interest you pay on a 401(k) loan does not go to a lender. Instead, those interest payments go right back into your retirement savings account. So what’s the point of paying interest? This type of lending is designed to get your 401(k) restored to its previous amount in a given stretch of time. The interest is essentially there to get your 401(k) back on track.
Credit cards offer one of the most common and easiest ways to borrow money. By swiping your card for a purchase, you’re having the creditor advance the funds to cover the expense of whatever you buy. That amount is then paid off when it comes time to settle your bill.
As long as suitable payments are made in a timely fashion, credit card debt isn’t necessarily a bad thing. Responsible borrowers can build on their lending reputation by handling these expenses and slowly building their credit score.
If these payments aren’t made, however, that information will appear on your credit report, potentially making it difficult for you to borrow money later on. High-interest credit cards, which should be avoided if possible, present an even greater risk by tacking on a huge amount to your debt whenever a payment is missed.
While credit cards can be an effective and easy way of borrowing money, doing so must be approached with caution and restraint. If handled appropriately, opening a line of credit can be a great step forward in building your financial future.
Cash advance from credit cards
In addition to making purchases, credit cards can also be used to get cash. For instances where you need a relatively small amount of money, perhaps just a few hundred dollars, this approach to borrowing money might be helpful.
Most credit cards can be used at ATMs to access funds, as long as they have a corresponding PIN. If not, a local bank may be able to facilitate the withdrawal. Although cash advances present a convenient option, they can cost a lot. In addition to any ATM or banking fees, you’ll likely be saddled with a higher interest rate than you would on a typical credit card purchase. In addition to interest, there is typically a 3% fee of the advanced amount. While it might be convenient, this means of borrowing money can be very costly in the long run.
Where’s the best place to borrow money?
When you’re borrowing money for whatever reason, it is extremely important that you work with a trustworthy and reliable institution. Here’s a look at some of the most secure borrowing resources that can offer financial assistance:
- FDIC-insured banks
- Credit unions
- 401(k) accounts
Banks and lenders offer a variety of available lending options. Whether you’re looking to buy a home, purchase a new car or cover medical expenses, these accredited institutions can help you meet your financial needs.
Credit unions might offer fewer lending options than traditional banks, but membership means you’ll likely have access to better rates. Since these institutions aren’t publicly traded, they only need to bring in enough money to pay for operations. Credit Unions are also "member" owned, meaning profitability is shared or passed through to its members.
Credit unions can be a great way to borrow money, but their locations are few and far between. Depending on where you’re located, brick-and-mortar credit unions might not be in the area. If convenience and accessibility are priorities when seeking a lender, traditional banks might present a better partnership.
As mentioned above, 401(k) accounts can be utilized to borrow money from funds you’ve set aside for retirement when needed. While not the intention behind retirement accounts, this kind of loan does not carry taxes or penalties on the funds borrowed.
You’d only be required to pay a low rate of interest, which goes directly back toward your 401(k), restoring the account in an established amount of time.
Borrowing money can be an excellent way of building your credit history and establishing a solid financial future. However, irresponsible borrowing can quickly turn against you, resulting in steep monthly bills and high-interest debt.
Personal loans and excessive use of credit cards can be costly. Before considering either, you should consult a credit counselor. Services are available for free in many states. If you are considering a 401K loan you should consult a financial planner or your tax professional to understand the implications.
As long as you take a reasonable approach and live within your means, unforeseen expenses and money emergencies can present a much less daunting possibility.