Depending on your circumstances and why you need to borrow money, some borrowing options can be better than others.
Even with the best-planned budgets, surprise expenses can leave you without enough money to cover all the bills.
When you need a bit more cash than you have on hand, there are lots of ways to borrow.
Each loan application can result in a hard-pull in your credit, which can affect your credit score and cost you money in the form of higher interest rates or even higher insurance rates.
You’ll want to narrow your choice of lenders before applying for a loan to limit the effect on your credit score.
If you don’t need the money right away, banks can be a good place to borrow money in the form of a personal loan. Some banks don’t provide personal loans, however, and you may need good credit to qualify for a bank loan.
On the plus side, you can often get a personal loan from a bank without origination fees, which can add 1% to 8% to the cost of the loan. Preferred rates may also be available if you have a checking account with the bank and set up automatic payments.
- Fast loan approval: Bank loan decisions can be quick, although it can take a few days for the loan to be disbursed.
- Higher borrowing limits: Personal loans through banks can have borrowing limits as high as $50,000. Expect higher limits to require collateral, higher credit scores, or higher income.
- Relationship discounts: Some banks offer a relationship discount if you have an account with the bank already. This can lower the cost of interest on the loan.
- Unsecured line of credit: In addition to fixed-rate personal loans, some banks offer unsecured personal lines of credit. Typically, bank lines of credit are for larger loan amounts, often $20,000 and up, and may come with variable interest rates.
- Interest rates can be high: Expect rates as high as 19%, although lower rates are available for those with good credit.
- Prepayment penalties: Some banks charge fees for paying your loan back early.
- Origination fees: Some banks may charge an upfront percentage of the loan, often about 2% of the total loan value.
Personal loans available through credit unions are similar to personal loans through banks, although you’ll often find more flexibility in the amount you can borrow. The catch: you’ll have to be a member of a credit union.
- Lower interest rates: Credit unions are member-owned and often have lower overhead than banks. This can mean lower borrowing costs for members.
- Flexible borrowing limits: In many cases, you can often borrow as little as $500 or as much as $50,000.
- Discounts for automated payments: Savings of .25% to 1.00% may be available if you sign up for autopay.
- Members only: You’ll have to be a member of a credit union before you can do business there. Membership may be restricted to those in a certain occupation, members of a group — like a church or labor union, or by location.
Credit cards provide 2 ways to borrow money. You can charge the amount you need to borrow to your card, of course. However, this isn’t a fit for all situations.
Sometimes, you’ll need actual cash to help navigate a temporary cash crunch. As an alternative, you can usually take a cash advance from your credit card. The latter option can be particularly costly.
- Easy access to money: If you already have a credit line, there’s no delay if you need to charge an amount to your card or if you need to take a cash advance.
- Wide acceptance: Major credit cards are accepted for a number of purchases. You may have the option of charging a monthly expense you would normally pay by cash or check to free up some money to cover an emergency expense.
- Expensive rates: If you can’t pay off the amount you borrow within a short time after borrowing, credit cards can be among the most expensive ways to borrow.
- Cash advance fees: It isn’t uncommon for credit card lenders to charge a fee of 3% to 5% for cash advances. The fees are added to your cash advance balance and you may pay interest on the fees as well as the amount borrowed.
- Special rates for cash advances: Even if you have a great credit card interest rate, the rates for cash advances are often higher.
- Daily limits: The amount that you can charge or take as a cash advance in a day may be lower than the amount you need.
You can borrow against a 401k plan or 403b plan — if your plan supports the option. Federal rules require that you pay back the loan with interest (to your own account) through a payroll deduction.
This means you can’t borrow from a plan sponsored by an old employer and if you change jobs, your loan balance could be counted as income.
- Borrowing from yourself: With 401k loan, the interest you pay is paid to your own account.
- Potentially high borrowing limit: Federal rules allow you to borrow up to 50% of your vested account value, with a cap of $50,000.
- Retirement considerations: When borrowing from your 401k, the money you borrow isn’t growing anymore. This can have long-term costs that may not be obvious until later in life.
- Tax risk: If your loan can’t be repaid because you lost your job or for another reason, the loan balance can be considered to be a withdrawal, which can trigger a penalty of 10% as well as make the loan balance taxable as regular income.
You can’t borrow from an individual retirement account but there are a few ways to access your funds without paying a penalty.
IRS rules allow you to withdraw money from a traditional IRA without penalty if you are buying or building your first home (up to $10,000), or for certain medical expenses, or if the money is used to pay for approved educational expenses.
If you have a Roth IRA, the entire amount of the amount you’ve contributed can be withdrawn at any time without penalty or income tax consequences.
- No cost to withdraw from a Roth IRA: If you’ve contributed $10,000 to your Roth IRA so far, you can take that money back out at any time. Amounts above your contribution have withdrawal restrictions.
- Early withdrawal penalty: Traditional IRAs are subject to a 10% penalty if you withdraw before age 59 ½ — in most cases.
- Taxable withdrawal: Traditional IRA accounts are subject to income taxes on withdrawn amounts. This can increase your tax bill and may even change your income tax bracket for the year.
- Retirement considerations: The amount you withdraw can’t grow in your account to provide for your retirement needs.
Peer-to-peer (P2P) lenders
Pioneered by Prosper, the first US peer-to-peer lending marketplace, P2P lending matches borrowers with lenders — often private individuals called investors. Now, several popular P2P platforms offer the opportunity to borrow money.
- Flexible loans: P2P loans are often available for more purposes than conventional bank loans.
- More accessible funding: Even if your credit is less-than-perfect, you can usually land a P2P loan. Expect to pay a bit more if your credit score is lower, however.
- Low rates: Rates can be much lower than credit cards and other types of borrowing.
- Fast lending decision: Loan approval times can be fast for P2P loans, However, funding the loan may still take a few days.
- Origination fees: Expect to pay an origination fee of as high as 5% with P2P loans. Borrowers with good credit may earn lower loan fees as well as a lower interest rate.
- Mid-range credit required: For some P2P lending platforms, a credit score of 600 to 650 is required.
Private businesses (store financing)
If the hot water heater fails or you find out your car needs $1,000 worth of work to fix that funny sound it was making, you’ll often have the option of financing with the service provider.
Many times these credit lines are structured to have no interest charges, as long as you pay the balance within the prescribed amount of time — usually 3 to 6 months.
- Easy approval: Because store financing usually has a lower credit line, getting approved is easier than with some other types of borrowing.
- Extra discounts: Store financing through private businesses can include perks, like extra discounts, reward points, or interest-free promotions.
- Limited use: You can only use store financing at the store or chain that offered the credit line, which limits the usefulness of this type of borrowing.
- Small credit lines: Store credit often has relatively low credit lines. Choosing to lean on store credit if you don’t have other credit cards can also raise your debt-to-credit ratio on your credit report significantly.
- High interest rates: Store financing can have higher interest rates than other types of credit.
A payday loan is a small loan — typically between $50 to $300 — designed to help you cover expenses until the next payday.
Interest rates on an annualized basis are extremely high for payday loans but in an ideal situation, you won’t have your loan for more than a week or two.
If you don’t expect any extra money coming in, payday loans can be rolled-over to the following payday — but you’ll pay another fee.
For many households, it may be best to avoid payday loans unless you’re certain you’ll have some extra money coming in so you can pay off the loan.
- Instant cash: Few types of borrowing can put cash in your hand as quickly as a payday loan.
- Credit score isn’t a factor: Payday loans aren’t based on your credit score. Instead, the lender needs to verify that you have income or may require a post-dated check.
- High interest rates: While structured as fees as opposed to annual interest rates, the borrowing expenses for a payday loan can add up quickly if you need to roll over the loan for another week — or two — or three.
- Low borrowing limits: If you need to borrow more than a few hundred dollars, a payday loan isn’t the right tool for the job.
- Availability: A number of states and US territories prohibit payday lending.
Pawn shops are another popular option when you need a small loan for a short amount of time. Unlike many other types of loans, a pawn shop loan is based on collateral. Let’s say you have an electric guitar that you don’t use but you’re $100 short on some bills for the month.
Assuming the guitar is worth more than $100, a pawn shop can take the guitar as collateral and give you a $100 loan. Some pawn shops may only lend a percentage of the collateral’s value.
Pawn shop loans are short term loans and interest payments must be made to prevent the pawn shop from selling your item. To get your collateral item back, you’ll need to pay the principal as well.
- Fast cash: Like payday loans, pawn shop loans can put cash in your hand quickly.
- No credit check: Your loan is based on the value of your collateral so your credit isn’t affected.
- High borrowing costs: In effect, you’re paying monthly interest to prevent the pawn shop from selling your collateral. When viewed as an APR, the annual cost of pawn shop loans can be over 400%.
- Risk to collateral: Whatever you use as collateral to get a pawn shop loan might be sold if you don’t make the required interest payments. Consider the risk carefully before taking a family heirloom to the pawn shop.
Similar to pawn shops, title loans use your vehicle as collateral for a loan. Your collateral might also be a boat, motorcycle, trailer, or anything else that has a title of ownership.
Where you get your title loan can make all the difference, however. Less reputable lenders can charge exorbitant rates, whereas banks and credit unions can often provide a title loan as well with a more reasonable interest rate.
- Easy approval: Because you’re reducing risk for the lender by offering your title as collateral, it’s fairly easy to get a title loan.
- Interest rates: If you use a reputable lender, interest rates for title loans can be less than 10%, even with less-than-perfect credit.
- Interest rates: With some lenders, the interest rates for title loans can be extremely high, which can make it difficult to keep up with payments. With some title loans, you can pay considerably more in interest than the amount you borrowed.
- Collateral risk: If you’re unable to make title loan payments, you can lose your vehicle, which may affect your ability to travel to work, etc.
- Availability: Title loans are banned in many states.
Home equity loans
Recent tax changes have made home equity loans less attractive because the interest deduction only applies to funds used to improve your home.
Home equity loans remain a popular way to borrow and can make sense if you have time and need access to a larger amount of money.
- Low interest rates: Home equity loans and home equity lines of credit usually have lower interest rates than other types of loans.
- Collateral risk: If you can’t make payments, your home may be at risk.
- Slower process: Home loans can take weeks or months to complete.
- Closing costs: In many cases, the loan process can involve appraisals and other expenses. Loan origination fees can apply as well.
Family and friends
In some cases, turning to family or friends may be the best option if you need to borrow money — but there’s also a risk to the relationship if you’re unable to pay or if there’s a disagreement along the way.
If you need to borrow money from family or friends, have a frank conversation about terms and expectations. Some people use a written loan agreement.
- Safety: Unlike some lenders, your family and friends have your best interest at heart.
- Risk to relationship: Money matters can bring unwelcome tension into any relationship.
- Tax considerations: For both the borrower and the lender, there can be tax implications — especially for no-interest loans or for loans that are never repaid.
Q&A about borrowing money:
Where can I borrow money online instantly?
Because it can take time to process your loan application and to disburse your funds to your account, it’s best to think of “instant loans” as same-day loans or next-day loans.
Here are some common options if you choose to borrow online:
- LightStream Loans
- Best Egg
How can I borrow money with no credit?
Expect borrowing limits to be low and interest rates to be on the high side, but borrowing money with no credit history is possible.
You may need a cosigner with some lenders or you may need collateral, like with a title loan or a pawn shop loan. In many cases, however, if you have verifiable income, you can get approved for small loans without collateral.
If you’re a member of a credit union, inquire with your local branch. Credit unions may be more willing to fund a small loan than a bank, particularly if you have an account history with the credit union.
Online lenders like LendUp can be another option. Payday lenders or pawn shops can be an option as well if you are certain you can pay back the loan quickly.
How can I borrow money with bad credit?
If your credit history has some dents and dings, borrowing options can dwindle. Some P2P lending sites offer loans for credit scores as low as 600.
LendUp, which markets itself as a payday loan alternative, doesn’t check credit scores. Payday loans, pawn shop loans, and title loans are also common choices for people with bad credit.
Rates can be high for bad credit loans, so shop around before signing the dotted line and be sure to check with your local credit union first. Maybe your credit history isn’t as bad as you think and you can qualify for lower interest loan.
How can I borrow money against my house?
Home equity loans and home equity lines of credit are both popular ways to access the money you’ve invested in your house.
Neither option is a solution if you need money quickly — but if you have some time, both options can be considerably less expensive in regard to interest rates. You’ll also have access to larger loan amounts — usually.
Borrowing against your home isn’t without risk, however. If you can’t make payments, the loan is secured by you home, which means the lender can force a foreclosure.
What is the best way to borrow money?
The best way to borrow money depends on your individual circumstances. Interest rates aren’t always the only consideration and a loan that makes sense for one person might be the worst possible move for another.
Safer options include P2P personal loans through banks or reputable online lenders, personal loans through credit unions, or personal loans through a growing number of P2P lenders.
Check the loan details carefully. Origination fees or other costs can change the long-term cost of a loan that looks good at first glance. Consider reaching out to your local member-owned credit union, in particular.
Many times, credit unions offer the best combination of affordable rates, lower fees, and access to credit — and are more trustworthy lenders than some other options.