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In this article, we’ll explore the 10 best ways to borrow money.
We’ll break down what you need to know about each option, including the pros & cons, as well as who each option is best for (and who should avoid it).
Key Takeaways About The Best Ways To Borrow Money
- There are many great ways to borrow money fast - no banker required! Options to borrow money fast include personal loans, credit cards, and peer-to-peer lending.
- While many of the best ways to borrow money require a good credit score, you'll be surprised at some of the clever ways you can borrow money even with bad credit, such as by using online lenders or borrowing from a family member.
- Before you take out a loan, make sure you find out the interest rates and terms you're being offered and how fast the cash will hit your bank account.
- You can even leverage your 401(k) retirement account to get cash fast, but there’s a catch.
The 10 Best Ways To Borrow Money
1. Personal Loan From a Bank
A bank is a financial institution that serves customers and businesses by receiving deposits, offering checking, savings, and investment accounts, and making loans. Types of loans banks offer include mortgages, auto loans, credit cards, and personal loans.
Pros of Personal Bank Loans
- Competitive rates and terms on loan products
- Fixed monthly payment and repayment schedule
- Having a relationship with a bank can make it easier to apply
Cons of Personal Bank Loans
- Origination fees and application fees can apply
- Good credit required for the best rates and terms
How Does Getting a Loan from a Bank Work?
Banks typically have established loan application procedures, either online or in-person, which require providing necessary documentation such as identification, proof of income, and credit history. It is advisable to check the specific loan requirements of the bank beforehand to ensure a smooth application process.
Personal loans from banks are best-suited for individuals with good-to-excellent credit scores and low debt-to-income ratios.
If you’re interested in getting a personal loan from a bank, start with your current bank and see if you meet the requirements. Sometimes, banks are more lenient with existing customers as opposed to new customers, so it’s always best to start with your current bank when looking for a personal loan.
2. Personal Loan From a Credit Union
The main difference between a credit union and a bank is that credit unions are typically not-for-profit institutions whereas banks are for-profit.
Getting a personal loan from a credit union follows a similar process to that of a bank loan. Credit unions often have lower interest rates and more personalized services compared to traditional lenders, which can save you money in the long run.
Pros Of Personal Loans From Credit Unions
- Credit unions may charge fewer fees and have better rates than banks
- Could be easier to get approved if you're already a credit union member
Cons Of Personal Loans From Credit Unions
- Some credit unions require membership fees
- Affiliations required for credit union membership
How Does Getting a Loan from a Credit Union Work?
Once you've selected a credit union of your choice, you'll need to gather the necessary documentation for the loan application. This typically includes identification documents, proof of income, and details about your employment history. The credit union will evaluate your financial situation and creditworthiness to determine the loan amount and interest rate you qualify for.
Credit unions can sometimes offer better rates than banks because they’re not-for-profit institutions. If you currently bank at a credit union, reach out to them and see what they have to offer when it comes to personal loans.
3. Borrow Money From Online Lenders
Online lenders operate solely online, allowing you to complete the entire loan process from the comfort of your own home.
Pros of Borrowing Money From Online Lenders
- Online loans are convenient
- Funding as soon as the next business day
- Online lenders have competitive rates and terms
Cons of Online Lending
- High interest rates and loan fees for bad credit
- Impersonal loan experience
How Does Getting a Personal Loan from an Online Lender Work?
To apply for a personal loan from an online lender, you'll need to complete an online application form. This will require you to provide personal and financial information, such as your name, address, income, and employment details. Some lenders may also request documentation to support your application, such as bank statements or pay stubs.
One of the advantages of online lenders is the speed at which they can process loan applications. Unlike traditional banks or credit unions, online lenders often provide quick pre-approval decisions, sometimes within minutes. This makes them a great option if you're in need of immediate funds for unexpected expenses.
Online lenders also typically have less stringent qualification requirements, accepting credit scores as low as 550. Keep in mind, though, that if your credit score is low, you won’t qualify for the best interest rates.
Browse the top online lenders for personal loans >>
4. Peer-to-Peer Lenders
Peer-to-peer loans, also known as P2P loans, are a type of borrowing that connects individual borrowers directly with investors or lenders through an online platform. This innovative lending model cuts out the traditional intermediaries, such as banks, allowing borrowers to access funds at potentially lower interest rates and investors to earn higher returns.
Pros of Borrowing Money from a Peer-to-Peer Lender
- Borrow what you need when you need it
- Easy online loan application
- Easier credit requirements than some other loans
Cons of Borrowing Money from a Peer-to-Peer Lender
- Watch out for loan origination fees, which can add up to 5% to your loan amount
- High interest rates for bad credit
Best peer-to-peer lenders in 2023 >>
How Do Peer-to-Peer Loans Work?
To obtain a P2P loan, borrowers need to go through a simple application process. They provide personal and financial information, similar to the process with traditional lenders.
Once approved, the loan is listed on the P2P platform for potential investors to browse. Investors can choose to fund the entire loan amount or contribute a portion of it, diversifying their investments across different borrowers. As more investors commit to funding the loan, the borrower's requested funds are accumulated.
Interest rates on peer-to-peer loans range from 7-36%, with a minimum credit score of 600 preferred, according to debt.org.
After the loan is fully funded, the borrower receives the funds in their bank account. Repayment terms are established and managed through the P2P platform. Borrowers make regular payments, including principal and interest, and the platform distributes the payments to the investors.
5. Home Equity Loans
A home equity loan is a type of loan that allows homeowners to borrow money against the equity they have built up in their property. Equity is the difference between the current market value of the home and the outstanding mortgage balance.
Pros of Home Equity Loans
- Qualify for competitive rates and loan terms
- Get a fixed interest rate and set repayment plan
Cons of Home Equity Loans
- Lose your home if you loan goes into default
- Reduce the amount of home equity you have
- Funding can take several weeks
How Does Getting a Home Equity Loan Work?
To get a home equity loan, homeowners typically need to have a significant amount of equity in their property. Lenders usually require borrowers to have at least 15-20% equity before they can qualify for a home equity loan.
The application process for a home equity loan is similar to that of a traditional mortgage. Borrowers need to provide personal and financial information, including income, employment history, and credit score. Lenders also consider other factors such as the loan-to-value ratio, which compares the loan amount to the appraised value of the property.
Home equity loans typically have a lower interest rate than personal loans and other types of borrowing. If you have equity in your home, this can be a great option to get money quickly.
6. 401(k) Loans
A 401(k) plan is a retirement plan offered by most employers that allow employees to contribute a percentage of their paycheck toward their plan. 401(k) retirement plans not only help employees save for and invest in their future, but they also come with significant tax benefits.
Getting a 401(k) loan allows individuals to borrow money from their retirement savings plan.
To get a 401(k) loan, first individuals need to check if their employer's 401(k) plan permits loans. If it does, they can typically borrow up to a specific percentage of their vested account balance or a set dollar amount.
Pros of Borrowing Against Your 401(k)
- 401(k) loans are no credit check loans
- Pay interest back to yourself
- Borrow from assets you already have
Cons of Borrowing Against Your 401(k)
- Risks of having to pay back funds immediately if you lose your job
- Money borrowed from your 401(k) is not growing for retirement until you pay it back
- You'll pay taxes and penalties on the distribution if you don't pay your loan back
- Can take several weeks to get loan funds
How Does Getting a 401(k) Loan Work?
To apply for a 401(k) loan, individuals need to fill out a loan request form provided by their plan administrator. The form will require information such as the loan amount requested and the desired repayment term. Generally, loan repayment terms range from 1 to 5 years, although some plans may allow longer terms for loans used to purchase a primary residence.
One advantage of a 401(k) loan is that there is no credit check involved. Approval for the loan is based solely on the available balance in the individual's 401(k) account. Additionally, interest rates for 401(k) loans are usually lower compared to other borrowing options.
Repayment for 401(k) loans is typically done through payroll deductions, making it convenient for borrowers. However, it's crucial to note that if the individual leaves their current job, the loan may become due in full, and failure to repay could result in taxes and penalties.
7. Credit Card Loans
A credit card loan allows individuals to borrow money from their credit card issuer. The loan amount is typically based on the individual's approved credit limit.
Pros Of Credit Card Loans
- Credit cards let you get funding quickly, sometimes with 0% APR
- Use your card for bills or take out a cash advance
- Some cards offer rewards for spending
Cons Of Credit Card Loans
- Interest rates are high
- Cash advance fees can apply
- Getting cash at an ATM means losing your grace period
How Does Getting a Credit Card Loan Work?
To obtain a credit card loan, individuals can either request a cash advance or apply for a balance transfer.
A cash advance involves withdrawing cash from an ATM or using the card at a bank. The amount borrowed is added to the credit card balance and is subject to interest charges and fees.
A balance transfer involves moving existing credit card debt to a new card with a lower interest rate. This allows individuals to consolidate debt and potentially save on interest charges.
Credit card loans generally have higher interest rates, averaging 24%. Because of these higher rates, it's important to carefully consider the cost of borrowing and explore alternatives if needed.
8. Margin Account
A margin account is a special type of bank account that allows people to borrow money from the bank to buy things like stocks or investments.
It's similar to borrowing money from a friend to buy a rare baseball card you expect to increase in value and promising to pay them back later.
Pros of Margin Accounts
- Potential for gains if your investment value goes up
- Better interest rates than other borrowing methods
Cons of Margin Accounts
- Considerable risk of losing money
- Collateral requirements apply
- You can only use this funding to purchase securities
How Do Margin Accounts Work?
Let's say you want to buy some stocks, but you don't have enough money to pay for them by yourself.
You can open a margin account with a bank or a brokerage firm. They will lend you the money to help you buy the stocks.
But remember, when you borrow money from the bank, you have to pay it back eventually.
In a margin account, you have to follow some rules.
One important rule is that you have to keep a certain amount of money in your account at all times. This is called the "margin requirement." It's like a minimum balance you have to maintain.
If the value of your stocks goes up, you might make some money.
But if the value goes down, you might lose money.
If your account value falls below the margin requirement, the bank might ask you to put more money in your account to make up for the loss. This is called a "margin call."
Margin accounts can be helpful if you want to buy more stocks than you can afford with your own money.
But they also come with some risks. It's important to be careful and understand how they work before using them.
It's a good idea to talk to a financial advisor if you have more questions about margin accounts.
9. Buy Now, Pay Later Options
Buy Now, Pay Later options allows consumers to make a purchase upfront and defer the payment for a later date.
When shopping online or at a participating retail store, customers have the option to choose a Buy Now, Pay Later option at checkout. They can then split the cost of their purchase into more manageable installments, often interest-free.
Pros of Buy Now, Pay Later Options
- Get funding for items you need right now
- Pay off your purchases with regular payments
Cons of Buy Now, Pay Later Options
- You can use BNPL to make a purchase but not borrow cash
- Potential for high interest rates and fees
How Does Buy Now, Pay Later Work?
Buy Now, Pay Later options usually run for a certain period, typically ranging from a few weeks to several months.
Depending on the provider, there may be specific terms and conditions, such as late fees or interest charges beyond a certain point. But as long as the payments are made on time and in full, customers can avoid any additional costs.
Buy Now, Pay Later can be especially useful for unexpected expenses or when extra time is needed to pay off purchases.
10. Payday Loans
Payday loans are short-term loans that are typically due on the borrower's next payday. Payday loans are one of the quickest ways to access cash – typically taking one business day to get funded.
However, they are one of the most expensive types of loans and can end up putting the borrower in a dangerous cycle of using a payday loan prior to each paycheck.
Because of this, we recommend avoiding payday loans unless absolutely necessary.
Pros of Payday Loans
- Easily accessible, and the application process is quick and simple
- Borrowers with poor credit can still qualify for a payday loan
- Funds are disbursed quickly, providing immediate financial relief
Cons of Payday Loans
- Significantly higher interest rates compared to other types of loans
- The repayment period is short, typically two to four weeks
- Those who are unable to repay the loan on time may fall into a debt cycle, accumulating additional fees and interest
How Does Getting a Payday Loan Work?
Borrowers can apply for a payday loan either online or in person at a payday lending store. The application process is usually quick and simple.
Payday lenders typically do not perform a thorough credit check, making it easier for individuals with poor credit to qualify for a loan. Approval is usually based on the borrower's income and ability to repay.
The loan is typically due on the borrower's next payday, usually within a few weeks. The borrower writes a post-dated check to the lender for the loan amount plus any fees. If the borrower is unable to repay the loan in full, they may have the option to extend it.
Tips on Borrowing Money
1. Evaluate your financial situation: Before taking out a loan, assess your current financial position. Determine your income, expenses, and existing debt. This will help you understand how much money you can realistically borrow and afford to repay.
2. Research loan options: Explore different types of loans available to you, such as personal loans, credit union loans, or online lenders. Compare interest rates, loan terms, and eligibility requirements to find the best option that suits your needs.
3. Improve your credit score: A higher credit score can help you secure better loan terms and lower interest rates. Pay your bills on time, reduce debt, and check your credit report for any errors or discrepancies that need to be addressed.
4. Consider the total cost of borrowing: Look beyond the interest rate and consider other fees and charges associated with the loan. Read the fine print and understand the repayment terms, late payment penalties, and any origination fees.
5. Borrow only what you need: Avoid borrowing more money than necessary. Borrowing a larger amount may be tempting, but it can increase your debt burden and make it harder to repay.
6. Have a repayment plan in place: Before borrowing, create a budget that includes the loan payments. Ensure you can comfortably make the monthly payments without straining your finances. Having a clear repayment plan will help you stay on track and avoid falling into a debt cycle.
Final Word
There are many ways to borrow money quickly, including personal loans from banks, credit unions, and online lenders, peer-to-peer lending, credit card loans, margin accounts, and payday loans.
Borrowing money can be a helpful tool in managing your financial needs, but it's essential to approach it with caution and consideration. Before taking out a loan, evaluate your financial situation and determine how much you can realistically afford to borrow and repay. Research different loan options, comparing interest rates, terms, and requirements to find the best fit for your needs.