At some point, most people need to borrow money. Maybe they need to pay for college or need a new car. Maybe they want to buy a home or start a business. In most cases, people in these situations consider borrowing the funds they need.
Below are listed some ways to get the funds you need, along with pros and cons.
Banks make a profit when they loan money as they charge more interest on loans than they provide on savings accounts. In addition, they offer a variety of instruments such as mortgages, auto loans and personal loans.
Pros: It’s easy. Most people have a relationship with their local bank, and there are people on hand to answer questions and walk you through the process. There may be a notary public on hand as well.
Cons: High bank fees and service fees.
Using a credit union
A credit union is cooperatively controlled by its members and accountable to them.
Pros: Since they are a nonprofit institution, they tend to offer better rates, and fees will be low or nonexistent.
Cons: Membership requirements and fewer loan products.
This is also called social or crowd lending. Individuals help each other directly instead of going through a middleman. Borrowers and lenders typically use an online platform to find each other, and then they will agree on the interest rate charged and the loan timeframe.
Pros: Interest rates may be lower, and borrowers may get a loan even if they wouldn’t normally qualify for credit.
Cons: Loan terms may be more complex, and borrowers may owe money to multiple lenders.
Using your 401(k)
This is a way to borrow money from yourself. Most 401(k) plans allow the withdrawal of funds in the form of a loan. While a permanent withdrawal would bring penalties, a loan does not. However, there is a five-year limit and limits on how much you can borrow.
Pros: Interest rates are low, and the money is returned to your account. Also, there are no underwriting or application fees.
Cons: If you default, you will pay penalties. Additionally, you lose out on growing your retirement account when you remove funds.
Using a credit card
You borrow money from the credit card company when you use a credit card. You don’t pay interest if you pay it off at the end of the grace period. You can also make a cash advance.
Pros: No application fees. If you pay off your balance monthly, this loan will not cost you anything.
Cons: If you don’t pay off the balance at the end of the month, you can be charged a very high rate. Using cash advances can also hurt your ability to get more traditional loans.
One novel option that is increasingly being used is online small business lenders. Lantern by SoFi is a great online marketplace that provides information about both business and personal loans. You can use Lantern by SoFi to check pre-qualified rates that are 100% free. Compare rates and shop around in one safe place.
Pros: Easy to use and allows you to shop for the best rates and lowest fees
Cons: You need to be comfortable with an online platform.
As you can see, many options are available if you need to borrow money. Therefore, you need to evaluate the pros and cons to decide which is best for you.