When you are in a money pinch, there are several sources of capital at your disposal. They all have various interest rates, fees, and terms. When you need to borrow money, consider all these items carefully.
Bank Loans
The most efficient, lowest-cost form of loan is usually to borrow money from a bank. It requires good credit and a good relationship with your bank. Depending on your reason for borrowing money, you may need to put up collateral for the bank. You will get the lowest interest rates with secured loans. These are loans against an asset, such as a house or a car. They carry lower risk to the bank so they also come with lower interest rates. Unsecured loans and lines of credit carry higher interest rates.
Credit Cards
Credit cards are a very easy but very expensive way to borrow money. If you only need cash for a few weeks, the cost can be reasonable. But if you need cash for an extended period of time, there are usually cheaper ways to borrow money. Also make sure you understand your payment cycle, interest rates, and payment information before using this method.
Loans from Family Members
Getting a loan from a family member or friend can be very flexible. You can set the terms with the lender. However, borrowing from family members and friends can stress your relationship. Make sure you set everything out in writing, including the interest rate, payment schedule, and penalties for late payment.
Peer Lending
If you need a loan for a small business venture, you can borrow money online through peer lending. Peer lending websites connect borrowers and investors who can connect to fund a business idea, pay off debt, or finance another type of purpose.
401k Loans
If you have money saved in a 401k plan with your employer, you can usually borrow up to 50% of the value of your account. You pay interest on the loan, but the interest goes back into your account. Be aware that you have an opportunity cost with this option. The money you borrow is not able to grow as an investment until you repay the loan. Also be aware that you will have to pay back the loan in full shortly after you leave the company. Consult your tax professional to understand the tax ramifications that this may cause in retirement. Your interest is usually considered pre-tax money and will be taxed upon retirement, even though you paid it with after-tax dollars.
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