Seldom does anyone get the opportunity to skate through life without having to borrow money.
Of course, many people borrow money to buy a house or a new car. But the kind of borrowing we’re referring to is the use of credit cards or personal loans to cover monthly cash shortages and emergencies.
If you need to borrow money to pay your bills and basic expenses, your options may include:
- Taking out a personal loan
- Applying for a home equity loan or HELOC
- Getting money from 0% balance transfer credit card “checks”
- Using credit cards and taking cash advances
- Borrowing from retirement accounts
- Peer-to-peer borrowing
- Borrowing money from friends or family
- Pawning items at a local pawnshop
- Taking out a “payday” loan
But keep in mind that most of these money borrowing options come with high-interest rates or other terms and conditions that could create more financial stress in your future.
Keep reading to learn more about carrying consumer debt and changes to FICO credit scoring models that may impact your ability to borrow money and increase the amount of interest you’ll pay.
We’ll also discuss the pros and cons of different ways to borrow money.
Many Americans rely on debt to navigate their lives. According to November 2019, Federal Reserve figures, the US population is carrying over $4.0 trillion in consumer debt.
Revolving debt is just over $1.0 trillion of that amount.
Rising debt levels may reduce your credit score even more in new versions of FICO credit scoring models.
According to a January 2020, Wall Street Journal article, the Fair Isaac Corporation (the creator of FICO scores) will “soon start scoring consumers with rising debt levels and those who fall behind on loan payments more harshly.
It will also flag certain consumers who sign up for personal loans, a category of unsecured debt that has surged in recent years.”
Taking On Debt
Regardless of the reason, you may face situations where you need to take on debt to keep moving forward.
But the type of debt you take on could really take a toll on your financial health.
You’ve probably heard of “good” debt and “bad” debt. But remember, debt is debt.
While “good” debt is low-interest debt that can help boost your income and net worth while bringing value to your life, it’s still debt.
Some believe that mortgages and student loans fall into this category.
“Bad” debt carries high-interest rates and wreaks havoc on your financial stability and future.
Credit card debt is a good example of this type of debt.
If you have to borrow money, do it responsibly with a reasonable plan for repaying the debt as soon as possible.
You should also be sure you know precisely how much money you need to borrow. And what monthly payments you can afford.
9 Ways To Borrow Money
There are plenty of ways to borrow money. But it is important to understand the specific qualifications for borrowing money from lenders. Including, the terms and conditions of the loan and repayment.
Getting money fast might solve your immediate problem. Though, over the term of the loan, it could cost you hundreds (or thousands!) of dollars more than you borrow.
That’s why you need to consider all of your money borrowing options before signing up for a loan.
1. Personal Loans
You can apply for a personal loan from traditional banks, credit unions, and online lenders.
Interest rates on personal loans vary dramatically and can range from 5-36%, based on the lender and your credit score.
Higher scores usually lead to lower interest rates. An important reason to keep your score as high as possible.
Most personal loans come with fixed interest rates, so your monthly payment won’t fluctuate. But you may have to pay an origination fee to the lender for processing the loan.
The fee may be as high as 6-8% of the loan. And it may be taken from the amount you borrow.
Lenders may also include a prepayment penalty in your loan terms. If you pay off the loan early, the penalty helps to offset some of the interest revenue lost by the lender.
2. Home Equity Loans or Lines of Credit
If you are a homeowner with equity in your home, you may be able to access some of the equity by taking out a loan or line of credit.
A home equity loan is essentially a second mortgage in which you borrow money using the equity in a home as collateral for money borrowed.
A home equity line of credit (HELCO) is a revolving line of credit secured by the equity in a home.
Despite ads that boast you can get your money in a few days, if you need money fast – this option probably won’t work for you.
Most traditional lenders need a minimum of 2 to 4 weeks (often longer) from application to closing for a home equity loan or HELOC (Home Equity Line of Credit).
You’ll also need to supply a volume of documents.
That could include current pay stubs, 2 years of tax returns, verification of other sources of income, current tax assessments, mortgage statements, and more.
In addition to the time it takes to borrow equity in your home, you might pay thousands in closing costs to get your money.
You could also lose your home to foreclosure if you stop making loan payments.
3. 0% Balance Transfer Credit Card “Checks”
You may receive offers in the mail for 0% “balance transfers” from lenders if you open up a new credit card.
If you already have credit cards, you might get “convenience” checks in the mail that you can cash or send for use in paying off other debt.
While it might be very tempting to use a 0% balance transfer offer to get money when you need it, you should proceed with caution if you’re considering this borrowing option.
Your level of credit utilization will jump dramatically if you use a large portion of your available credit on a credit card.
This can lower your credit score because high levels of credit utilization negatively impact your credit score. New credit scoring models will likely increase the effect too.
If you can’t pay off your balance at the end of the promotional period (typically 6-15 months), you’ll have to pay off the remaining balance at your standard credit card interest rate (likely 15-24%) or the rate you agreed upon when you accepted the credit card offer.
Purchases and cash withdrawals may be excluded from the promotional 0% rate too.
Unless you pay off your full balance (including the balance transfer), you could be charged interest on purchases from the date of the transaction; even if you pay for purchases in full and on time every month.
4. Using Credit Cards and Taking Cash Advances
Credit cards are reasonably easy to secure and very easy to use.
The convenience factor is one of the reasons so many consumers use their credit cards to pay for everyday expenses with the intention of repaying that debt at the end of each month.
Unfortunately, credit cards are so easy to use that consumers tend to overspend without any real intention of doing so.
When things shake out at the end of the month, some people can't repay their credit card debt. It then starts accumulating at lightning speed.
The end result is ever-growing credit balances that carry high-interest rates and increasing monthly payments.
Credit Karma reported the national average APR of all the credit cards where interest was assessed in 2019 was approaching 17%. And if your credit score is fair or poor, your rate is likely much higher.
Taking a cash advance on a credit card can cost you even more with interest rates sometimes topping 25%.
The amount of cash you can take out is usually limited. Also, you may pay fees to your credit card company and the lender you get the money from.
You’ll probably start paying that high interest from the transaction date and not be given a grace period too.
If you decide to go the credit card route for your borrowing needs, you need to do so with every intention of being very disciplined about what you spend. You also want to make sure you never borrow more than you can repay.
- Further Reading: How to Pay Off Credit Card Debt for Good
5. Borrowing From Retirement Accounts
If you're the proud owner of an employer-sponsored 401(k) or individual IRA account, you might have a way to get money. But borrowing isn’t the same as withdrawing money from these accounts. Also, keep in mind that guidelines for either option are very strict.
In almost all withdrawal cases, you are restricted to hardship distributions for “immediate and heavy financial need” or “safe harbor distributions” to pay for expenses including the education of your child or yourself or for medical emergencies – if you want to avoid big fees.
You’ll also have to pay taxes on any money you withdraw. If you withdraw contributions made to a Roth IRA, you’ll avoid both taxes and penalties. But remember that both options take money out of investment accounts that you were planning to grow for your future.
You’ll avoid early withdrawal penalties and taxes when you make regular payments. But you'll pay interest to yourself on the money you borrow.
You’ll also miss market growth on money no longer in your account using this option.
- Further reading: How Do 401(k) Loans Work And What Are Their Pros And Cons?
You can’t take a loan from an IRA. But you may be able to “borrow” money for 60 days or less with an IRA rollover.
According to the IRS with a 60-day rollover when “a distribution from an IRA or a retirement plan is paid directly to you, you can deposit all or a portion of it in an IRA or a retirement plan within 60 days.”
This would allow you to use the rollover money without penalty for up to 60 days before moving the money to a different qualified retirement account.
Keep in mind that retirement plan distributions paid directly to you are subject to mandatory withholding of 20%, even if you plan to roll it over. So if you take a $10,000 distribution, you’ll only get $8,000.
- Read more about 401(k) rollovers here and rollovers from other retirement plans and IRA distributions on the IRS website
If it’s available, borrowing from retirement accounts may be the best option for some people who need money.
There's essentially no real debt involved and the major downside only applies if the borrower fails to make payments.
In such cases, the money borrowed is treated as a distribution. That requires payment of a 10% penalty and the associated income taxes on the amount of the default.
6. Peer-to-Peer Borrowing
If you think you might have difficulty qualifying for traditional loans and credit cards, you still have options.
In recent years, peer-to-peer lenders, providing personal loans are claiming a bigger portion of the consumer debt market.
According to Investopedia, peer-to-peer lending is “lending that enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman.”
You might be more familiar with the term “crowdfunding.” That's the number one form of peer-to-peer lending.
It works like this. You register with a crowdfunding website like Prosper, Upstart, or Lending Club.
After you've completed the registration process, you state your case in the form of an application to borrow money from private individuals listed with the crowdfunding website.
When approved, you receive lending offers with stated interest rates and terms. Then, you select loans you prefer and the website facilitates all the monetary transactions until loans are repaid.
As a borrower, you need to concern yourself with high-interest rates. The rates you are quoted will likely reflect the credit risk you have indicated through your application. Interest rates can run from about 6.5% to over 35%.
While these loans may be convenient, the price of an easy loan transaction can be high.
7. Borrowing From Family and Friends
The rule of thumb is don't borrow from family and friends. Ever. It's the surest way to destroy important relationships. However, there's a case to be made for borrowing from family and friends in a pinch.
First and foremost, don't ask a loved one to borrow money without offering something extra in return. You might be Uncle Joe's favorite nephew or niece, but kind-hearted Uncle Joe is entitled to receive some benefit for helping you out.
It's also important that you fully commit yourself to abide by the terms of the loan as set forth in a written agreement (a must).
Again, this is a convenient way to borrow money. It's also going to potentially put a strain on the relationship until your loan is repaid. This is a situation where you need to be very mindful of the love motivating your friend or relative to help you.
8. Pawning Your Possessions
The next two money borrowing options only warrant consideration in an absolute emergency. When facing an emergency and needing cash fast, you can trade some of your assets for cash at a pawn shop.
When you initiate a transaction, you have the choice of borrowing money with your asset(s) as collateral or selling your asset(s) outright. Getting the money is fast and convenient but the cost of doing so is very expensive.
If you go the borrowing route, you'll usually pay fees and a hefty interest rate. A pawnbroker typically lends you from 25% to 60% of the item’s resale value.
You're then given a few months to repay the loan at a very high-interest rate. You also stand to lose your asset(s) if you fail to make payments on time.
If you sell your asset(s), you can expect to get about 50% or less of the asset's real value. Pawnshops usually make more money on loans to you than on buying your items outright.
Qualifying assets could be most anything that has value. But pawn shops are particularly fond of jewelry, artwork, collectible coins and currency, antique guns, and memorabilia.
9. Taking a Payday Loan
In an extreme pinch, you could always resort to securing a payday loan. As the name indicates, it's a loan that's going to become due on your next payday. That makes it nothing more than a short-term band-aid while you look for another option.
Aside from an easy application and qualification process, there's nothing to recommend here. These predatory loans come with incredibly high-interest rates and loan fees. And lenders are very aggressive about repayments.
If you get in the habit of renewing payday loans, the interest and fees will eventually destroy your financial stability. This is not a borrowing option for the faint of heart. If you do go this route, you must make repaying the loan on payday your highest priority.
Final Thoughts on Ways to Borrow Money
We’ve presented nine different options for borrowing money when your back is against the wall. As you can see, each option has pros and cons. All of them can end up costing you a lot of money if you don’t understand the loans or can’t pay them back on time.
Before you decide to pursue any of these borrowing options, you’ll want to carefully consider whether the loan is to pay for needs or wants. If you really need money, then you have to do what you have to do.
In the end, pursuing one of these paths will hopefully motivate you to save up an emergency fund as soon as possible.
- Additional Reading: Cut Monthly Expenses and Reduce Spending
Vicki and Amy are authors of Estate Planning 101 – a Crash Course in Planning for the Unexpected -coming soon from Adams Media.