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Whether you’re facing unexpected expenses, recently lost your job or need extra cash for an upcoming trip or project, you may be wondering if borrowing money is a solution. Luckily, there are a variety of lenders and financial products that can be tailored to meet everyone’s unique borrowing needs.
We’ll walk you through where you can borrow money as well as the different options, like personal loans, home equity loans and 0% introductory rate credit cards.
Knowing When to Borrow Money
The best time to borrow money depends largely on what you need the funds for, the type of loan and whether it’s secured or unsecured. There are also a few factors you should always consider when preparing to borrow money. It may be a good time to borrow money if:
- You have the financial resources to make monthly payments
- You have a budget in place to manage your finances moving forward
- Interest rates are low
- Your credit score is at least 670, although borrowers with lower scores can still qualify
- You’re willing to possibly pledge your home or other assets as collateral
5 Places to Borrow Money
If you need funds to pay for emergency expenses, want to finance a home improvement project or just want a buffer to cover unexpected bills, there are a number of places to borrow money.
Banks
Traditional banks are probably the first place you think of when searching for a loan or line of credit. Beyond savings and checking accounts, these institutions often offer customers a wide range of products like mortgages, personal loans, credit cards and retirement accounts. This selection can make your bank a convenient and flexible way to borrow money. That said, annual percentage rates (APRs) and loan terms may be less favorable compared to other lenders.
Credit Unions
Credit unions are member-owned financial institutions that are committed to serving their communities through competitive rates. Due to their community-based structure and ethos, these institutions may also have less stringent lending standards, making it easier to borrow money if you don’t have stellar credit.
Credit union personal loans also can be a more affordable way to borrow money because federal credit unions cap APRs at 18% for most loans. If you’re not already a member of a credit union, look into local options and contact them to learn more about borrowing opportunities.
Online Lenders
Online lenders are becoming increasingly popular because of their quick prequalification and streamlined application processes. This makes them a popular choice for people who need to borrow money now.
These lenders often feature personal loans with APRs between 3% and 36%, but this varies depending on the platform and the borrower. Online lending is a great option if you’re looking for a personal loan, but there are also a number of online mortgage lenders that can simplify the process of financing—or refinancing—your home.
Friends and Family
Borrowing from friends and family may not be your first choice, but if you have a low credit score—or no credit history at all—it might be your lowest cost (or only) option. What’s more, even if you have a good score, borrowing from friends or family you trust can be a great way to get a lower interest loan while paying that interest to someone you know, rather than a bank.
401(k) Plans
A 401(k) is an employer-sponsored retirement account into which employees can make tax-deductible contributions from their salary, up to an annual limit. Some employers also match a portion of contributions. Plan administrators typically offer employees a number of investment options, often including mutual funds and index funds. 401(k) distributions can begin at age 59 ½, and most early withdrawals come with a tax penalty equal to 10% of the withdrawal amount.
6 Ways to Borrow Money
Just as there are many places to borrow money, there are also a number of ways. That said, the best option will depend on how much you need to borrow, whether you’re willing to pledge collateral, your creditworthiness and other factors. Familiarize yourself with the below borrowing options before making a choice.
Personal Loan
Personal loans can provide funds for everything from travel expenses to emergency auto repairs and home improvement costs; however, you typically can’t use them for higher education expenses and to purchase a home. Traditional banks, credit unions, online lenders and peer-to-peer lending platforms offer these money loans. Terms typically range from two to seven years with interest rates from 3% to around 36% and limits between $250 to $100,000.
This borrowing option is extremely flexible because you can use the funds for a range of purposes—just check with the lender ahead of time to confirm if it permits your use. That said, personal loans are usually unsecured so borrowers need a credit score of at least 610 or 640 to qualify. However, applicants with higher scores will benefit from more favorable rates.
Some lenders let you prequalify before applying for a personal loan, which lets you see the interest rates you would receive based on your creditworthiness. Prequalifying is a handy way to shop and compare different lenders to find the best option for you.
0% APR Credit Card
Credit cards are a popular way to borrow money because the provider only charges you interest on your outstanding balance each month—not the total credit limit. Still, credit card APRs are often higher than those available with secured borrowing options and even many unsecured personal loans.
However, you can avoid interest accrual if you choose a card with a 0% introductory rate or pay off your balance every month. A 0% APR credit card is one that has no-interest financing on purchases or balance transfers for a set period of time. The 0% period typically ranges from 12 to 21 months, after which cardholders are subject to interest rates based on their creditworthiness.
When choosing the 0% card that fits your needs, consider the length of the introductory period, the APR once that period is over and whether you need it for a balance transfer or new purchases. If you plan to transfer a balance, find out if there are any fees associated with transfers; also consider a balance transfer credit card.
401(k) Loan
If you have a robust 401(k) and need to access cash quickly, a 401(k) loan may be a feasible option. This type of loan involves borrowing against the balance of your 401(k), and you can use funds in any way that your plan permits. Keep in mind, however, that if you don’t pay back the loan within five years, the IRS will treat it as a distribution; you’ll have to cover taxes and a tax penalty equal to 10% of the amount you borrowed.
If you leave your job before you pay off the loan, you have until the tax-return-filing due date for that tax year, including any extensions, to repay the full balance or to roll it over into another eligible retirement account. For example, let’s say you leave your job in February 2021 and receive no tax extensions. You have until April 15, 2022 to repay or rollover your 401(k) loan amount.
Personal Line of Credit
A personal line of credit lets a borrower access funds up to a certain limit on an as-needed basis. Typically available from traditional and online lenders, interest rates—with most at 10% APR or higher—are variable and are typically higher than personal loans. Before you apply for a personal line of credit, determine your credit score and prequalify with a number of lenders to find the most competitive terms available.
Home Equity Loan and Home Equity Line of Credit (HELOC)
Home equity loans and home equity lines of credit (HELOCs) are financing options that a borrower’s home equity secures. Because this type of financing is secured, interest rates are typically lower than other options. Home equity loans have fixed interest rates that average around 5%. HELOCs, on the other hand, have variable rates that typically start around prime plus 2% (approximately 5.25%).
In the case of a home equity loan, funds are dispersed in a single lump sum and the borrower is responsible for paying interest on the entire amount from day one. With a HELOC, lenders approve borrowers for a certain amount, which they can draw against on an as-needed basis; interest only accrues on what the borrower uses—the outstanding balance. To obtain a HELOC or home equity loan, contact your mortgage lender to evaluate your options.
Gift or Loan From Family or Friends
Depending on how much you need to borrow, a gift or loan from friends or family may be a good fit. However, if you choose to borrow from friends or family, consider a few tips before accepting:
- Ask someone you trust and with whom you’ll feel comfortable discussing finances
- Agree to the loan term, interest rate and payment schedule
- Determine how payments should be made each month—e.g., via check or bank transfer
- Get the agreement in writing so everyone understands the terms of the loan
- Create a loan amortization schedule that spells out the required payments
- Don’t be offended if someone declines to lend you money—they may not feel comfortable doing so, and that’s OK
How to Borrow Money With Bad Credit
Borrowing money with bad credit can be a challenge, but it isn’t impossible. However, because borrowers with low credit scores present more of a risk to lenders, they often face less favorable lending terms—like high interest rates and lower loan amounts. What’s more, depending on the lender and type of loan or credit card, a prospective borrower with bad credit may not qualify at all.
If you need to get a personal loan with bad credit, contact your local credit union to see if you’ll qualify. Some online lenders also specialize in loans for bad credit, so research all of your options before committing to terms.
How to Manage Borrowed Money Responsibly
Whether you’re borrowing money from a lender or friend, it’s important to make timely payments—even if they won’t be reported to credit bureaus. To manage the money you borrow responsibly, follow these guidelines:
- Don’t borrow more than you can comfortably repay
- Commit to making timely payments each month
- If you’re struggling to make payments, take a close look at your budget and evaluate which expenses you can reduce or eliminate
- Let your lender know if you anticipate making a late payment or are otherwise struggling to meet loan obligations
