How to Borrow Money

There is nothing new about borrowing and lending money. Here in the 21^st century, you can still get into trouble by borrowing money, but the process is much more regulated and respectable than it used to be. There are numerous legal, respectable – and with technology, quick and convenient methods – to get a loan.

Still, the basics remain the same: Borrowing money is more difficult and expensive if you don’t have much in the way of collateral. The less you need the money, the easier it is to borrow.

There are many ways to borrow money. Some are riskier than others. Some are more expensive. Some are better suited to particular needs, such as creating a business or buying a home. Some lenders are less aggressive about getting paid back.

The bottom line is do your research before borrowing. Know how interest rates and fees impact your loan. Shop around. Understand what you’re getting yourself into. Know when a loan is too good to be true.

Just know that not all methods of borrowing are created equal. Here is a look at how you can determine the best way to borrow money.

The Best Ways to Borrow Money

When you ask about the best ways to borrow money, you’re really asking about the methods that are accessible, safe, transparent, and reasonable.

Transparency means the lender clearly states, right from the beginning, what the loan will cost and how repayment will be structured. There are no hidden fees or penalties other than those that are spelled out before anything is signed.

Expect the lender to charge interest and fees. That’s how they make a profit on the transaction but understand how much of a profit and whether you should shop around more before choosing. A loan that is difficult to repay on time, and loaded with punitive fees and costs, is best avoided.

Banks and Credit Unions

In an ideal situation, banks or credit unions are the first stop if you’re looking for a personal loan. “Ideal” means your credit rating is strong, you have secure collateral to put up to back the loan and you have a relationship with the bank or credit union.

Banks are safe, secure and have the money to lend to borrowers who are good risks. On top of that, banks may offer an APR discount or flexible payment options to existing customers.

Credit unions exist to provide money, either in the form of loans or credit, to members. They may be willing to lend money if you’re in a less-than-ideal position to borrow, such as having a credit score below 660. Often, their interest rates are lower than a bank will offer. The hitch is that you must become a member of the credit union before applying for a loan. The fee to join should be counted in the cost of the loan.

The advantages of banks and credit unions include dealing with real people at a local branch or office; simple application processes; financial advice from professionals; and a variety of loan options.

Disadvantages: You will have to spend time shopping for the best rate, and your ability to secure a loan may depend on a good credit score. Also, the paperwork process may take days, or even weeks, to push through and receive a favorable decision.

» Learn More: How to Find the Best Bank

Online Lenders

If dealing with people is difficult, either because of anxiety or time restrictions, an online lender could be the perfect choice. It is also a great option if you are simply trying to shop for an interest rate and a lender quickly and conveniently.

You sacrifice personal contact and financial advice, but that can be a positive if speed and convenience are the priorities. With an online lender, you can find a rate and terms you like, then apply for the loan on the lender’s website. Online lenders occasionally offer lower interest rates and approve borrowers with lower credit scores.

While you may communicate via telephone or online chat, there is little opportunity to negotiate terms or interest rates with an actual human being. What you see online, is what you get.

0% APR Credit Card

The 0% APR credit card can be the right solution to a financial problem or a step toward increasing your debt. That depends on you and your understanding of how the card works.

You typically need good credit standing (680 credit score) to qualify for a 0% APR card. Such cards offer an introductory period, from 6-18 months, in which no interest is added to your total. It is also important to have good discipline and a plan to pay off the card before interest begins accruing.

Within that time period, you can use the card up to its credit limit to pay down other debts or to make purchases. If you pay off the card within the introductory period, you are free and clear of the debt without paying further interest.

The trap comes when you are unable to pay off the card during the introductory period. Past that point, the cards typically charge higher-than-usual interest rates, which can pull you into deeper debt.

A balance transfer credit card is slightly different. It means opening up a new credit card that typically has a 0% interest and the same 6-18 month “introductory” period. You would use the card to pay off the balance on another account, or accounts, thus eliminating the high-interest debt.

The downside is the transfer fee – typically 3%-5% of your balance – that gets added to what you owe, and you will be paying a high interest rate again as soon as the introductory period expires.

401(k) Loans

If you already have built up a sizable retirement account, a 401(k) loan can be an emergency solution for a short-term financial problem. Because 401(k) loans use your own money, your current credit score is not a factor in qualifying for the loan.

Check with your human resources to determine how much you have in your retirement account and whether your plan permits 401(k) loans. Most do.

Typically, there is no withdrawal penalty for borrowing from your own account as long as you pay it back on time. Any interest accrued goes back into your account. Most plans allow a consumer to borrow up $50,000 or 50% of the total savings (whichever is less) and allow five years to repay the loan.

On the downside, you will not gain value on the amount borrowed during the term to repay it. You are also taking a risk with your retirement funds, which can bite you if you are unable to repay the loan. If you leave the company, you may be required to pay the entire loan back quickly, so be sure to check the small print before making any career decisions.

Personal Line of Credit

Flexibility at reasonable terms is the appeal of a personal line of credit (PLOC). Accordingly, this option is most likely available to borrowers with good or excellent credit ratings. A PLOC, offered by many banks and credit unions, functions as a combination of a loan and credit card.

One significant advantage over both of those options is a lower interest rate on a PLOC.

If your application, based on credit profile, income, and other financial information, is approved, you have access to a specific amount of money. You then use only what you need and pay interest only on that amount. This is where the flexibility comes in. You can borrow what you need to cover events such as a wedding, a business, or a home improvement then pay back any funds you didn’t need.

Buy Now, Pay Later (BNPL)

If buy now pay later sounds like the basic idea behind all credit, it pretty much is. It is typically available from a retailer, often online but at times in a brick-and-mortar store. The seller allows the buyer to take the items home and then pay for them over a series of installments, often without interest or fees.

With the rise of buy now, pay later plans in retail stores, companies have emerged to provide their own alternative for consumers. Afterpay is a buy now, pay later company that never charges interest but may charge a fee for late payments. Affirm charges interest depending on the repayment term.

The easy access to BNPL plans may lead to overspending, so it is best to proceed only if you’re disciplined enough to use this method carefully.

Credit Card Cash Advance

It is a lot easier to draw cash from an ATM than to get a loan application approved. And that is the positive and negative of a credit card cash advance.

It is quick and easy, but that ease comes at a price. Essentially, you are adding the amount withdrawn to your credit card debt, often at an interest rate above 25%.

That painful rate is justified only when you’re facing a real emergency, or if you know you can pay off the advanced amount quickly.

Borrow from Friends or Family

One reaction to this idea includes skyrocketing blood pressure and anxiety. That’s normal enough for many. For some, borrowing money from friends can be the best option in a crisis, whether it’s your first option or your last. If there is an urgency in the situation, or if options with traditional lenders are limited, friends or family could be the only option.

One alternative is to ask the friend or family member to pay a bill or debt directly, with you agreeing to repay the amount.

The best way to approach such a loan, and to reduce anxiety all-around, is to treat it as a formal business arrangement. Agree upon terms, put them in writing and get the document notarized. Then do your best to honor the agreed-upon terms. The agreement should include a payment plan and steps for the lender if the loan is not repaid.

Peer-to-Peer (P2P) Lending

Peer-to-peer lending sites like LendingClub and Prosper connect borrowers with lenders, with a simple application process and options to accommodate borrowers with various needs and credit scores. If your bank won’t lend to someone with a credit score below 670, a P2P lender may be the answer, even if your score is as low as 600.

P2P lending is not legal in all states. The technological nature of the process means little or no in-person communication.

Public Agencies

The United States government helps private citizens obtain loans, usually through quasi-public agencies such as Fannie Mae or Freddie Mac. Government programs are often targeted toward certain areas of need, such as low-income housing, and involve extensive paperwork. Government-aided programs often carry lower interest rates and fees than commercials lenders.

Most of these programs are designed for low-income households, and there are often limits on income or assets of applicants.

» Learn More: Government Debt Relief Programs

Pawn Shop Loans

At the opposite end from government relief are options that veer closer to loan sharks.

Pawn shop loans sound slightly quainter than a loan shark. In this case, you provide collateral in the form of personal property such as jewelry, electronics, or antiques. The pawnshop assesses the item’s value, condition, and resale potential, then makes an offer.

If you accept that offer, you receive the cash amount and a pawn ticket. If you pay back the money and present the ticket, your item or items are returned to you. If you fail to repay the debt by the deadline, generally 30 days, the pawnshop keeps your property.

If the whole process sounds shady, it can be. The value of your property is determined by the pawnshop. So are the interest rate on the money loaned and any other fees. You don’t have the barriers provided at banks and other lenders based on your credit history, but you also don’t have all the protective regulations.

Borrower beware.

» Learn More: How Do Pawnshops Work?

Cash Advance Money Apps

Technology has risen to this occasion, too, or has it lowered itself? With cash advance apps, you can obtain small amounts of cash quickly and conveniently. As always, it costs more to get the money in larger amounts or faster times. Additionally, your personal banking information can become available to the app depending on which services you use.

» Learn More: Best Money Apps

Borrowing Methods to Avoid

Some of the above options are useful in all cases and some are more useful in certain occasions than in others.

Some options are just not good ideas to begin. Predatory lending is older than money, and it has only become more problematic with the advent of apps and the internet.

Payday Loans

Like many quick fixes, Payday Loans are a predatory lending practice that could lead you into a downward spiral of debt. The more you know about this often-advertised practice, the more you will want to avoid it.

A typical payday loan carries punitively high interest rates of 399% APR that make them difficult to pay off on time. That often leads to more debt to try to keep up with interest, a pursuit that never ends.

High-Interest Installment Loans

Like payday loans, this is a form of predatory lending. Here, the ploy is to lure borrowers into high-risk loans with shocking interest rates and fees. The bait, dangled before borrowers with poor credit histories, is an easily obtained loan with little or no hassle about credit scores.

High-risk loans come in different packages: title loans, which can put your car at risk; home equity lines of credit, which can lead to foreclosure on your home, and bad credit personal and debt consolidation loans, which bury the borrower under growing piles of debt

How to Pay Off Debt

It is true in most areas of life that it is better to avoid problems than to solve problems. With debt, this is especially important. If you can avoid excessive debt and be responsible in paying it down as quickly as you can, you may be able to avoid some of the above remedies.

There are some very sensible ways to deal with debt:

• Budgeting is more than just planning where your money goes. A monthly budget helps you avoid impulse spending and keep track of your income as well as your spending.
• Nonprofit credit counseling is an excellent place to start whether you are in financial trouble or merely looking to take smart steps to avoid it. Licensed counselors are legally required to offer the best advice for their clients, at no charge.
• For immediate help with debt, begin by checking out InCharge Debt Solutions to stop the debt spiral and begin getting your finances back on track.