Most of us have been in a situation where we’ve needed to borrow money. For some, borrowing comes in the form of student loans for college expenses, a mortgage for a new home, or a personal line of credit to start a new business. For others, borrowing has allowed them to make ends meet when they were in a financial bind.
If you need to borrow money, you have a variety of options. However, you’ll eventually need to pay your lender back, so it’s important to have a repayment plan. Below, we’ll review the most popular ways to access a loan, examine the pros and cons for each, and discuss an important alternative to borrowing.
Using a Credit Card for Purchases or Cash Advances
Credit cards can be an incredibly fast way to borrow money for purchases and build a positive credit history. Many offer rewards, such as cash back or airline miles, which can be used to make traditionally expensive purchases more affordable. Many credit cards also offer liability protections and fraud monitoring, providing their users with a more secure way to spend.
If you find yourself in need of cash, you can use your credit card to get a cash advance through an ATM or a bank. For most credit cards, cash advances are limited to a few hundred dollars at a time. They also come with additional ATM and bank fees, as well as a flat charge or percentage of the amount you advanced.
Unfortunately, the ease of making purchases with credit cards makes it easy to spend beyond your means. Many credit card users have fallen into the trap of only making minimum payments, allowing their debt to grow. Although credit cards can help build credit, they can also hurt your credit score if you miss your payments. Additionally, interest rates and fees can add up quickly, making it even harder to work your way out of credit card debt.
Pros of Borrowing With Credit Cards
- Fast way to borrow money
- Easy to build credit history
- Liability and fraud protections
- Reward programs
- Ability to get a cash advance
Cons of Borrowing With Credit Cards
- Easy to overspend
- High interest rates and fees
- Easy to miss payments or only pay monthly minimums
- Missed payments can damage credit score
- Cash advances are limited to a few hundred dollars at a time
Borrow From Retirement Through a 401(k) Loan
If you are in serious need of money, you may consider tapping into your retirement fund. While it’s not technically a loan because it doesn’t involve a lender or have any credit history requirements, you can “borrow from yourself” by accessing a portion of your 401(k) money before retirement.
The upside to this type of loan is that since your 401(k) is already part of your assets, you don’t need a credit check. However, it’s important to keep in mind that pulling from your retirement fund can minimize the amount of money you’ll have access to in the future.
One of the biggest risks of taking out a 401(k) loan is if you lose or change your job before you’ve made all of your repayments. While you can roll your retirement plan over to a new employer, you cannot roll over a 401(k) loan. If you don’t repay your loan before your federal income tax return deadline, the unpaid balance becomes taxable income and triggers an early distribution penalty.
There are some rules set by your employer and the IRS regarding how much you can pull from your 401(k) and when it should be repaid. The IRS requires that you repay a 401(k) loan within five years, but some employer plans can be extended to 15 years under certain circumstances, such as using that money to buy a home. Make sure that you’ve reviewed and fully understand the agreement before taking out this kind of loan.
Pros of Borrowing From Your 401(k)
- Can access retirement funds early
- No credit check needed
- Repayment within 5 to 15 years
Cons of Borrowing From Your 401(k)
- Depletes your retirement savings
- Risk penalties and taxes if you are unable to pay in time
- Unable to roll over loan if you lose your job or change employers
Borrow Money Fast Through a Pawn Loan
If you’re willing to put a treasured item on the line, you may consider a collateral-based loan through a pawn shop.
With this process, you’ll need to take something of value, such as a piece of jewelry, electronics or a collector’s item, to a pawn store. The pawnbroker will evaluate your item and offer a short-term loan based on its value. Once the borrower pays the loan back, the pawnbroker will return the collateral.
Pawn loans are a fast way to borrow money, but the actual amount you may receive is dependent on the value and condition of your collateral, as well as the current demand for that particular item. If you are unable to pay back the loan in the agreed-upon time, you’re at risk of losing your collateral altogether.
Pawn shop loan offers and interest rates can also vary based on your location. Depending on your state, you may be paying 2.5% to 25% interest a month on your loan. Different shops have varying specialities and profit margin goals as well, meaning that the offer you’ll receive on your collateral can vary wildly depending on which pawnbroker you go to.
Pros of Borrowing With a Pawn Loan
- Fast way to obtain a small, short-term loan
- No collection action or effect on your credit report if loan isn’t paid back
Cons of Borrowing With a Pawn Loan
- Shop keeps item if borrower doesn’t pay them back
- Loan amount limited to value and condition of collateral, demand for item
- Loan offers and interest can vary greatly
Borrow Money From Friends and Family
If you’ve exhausted all other options, you may consider asking a friend or family member to loan you cash. If they’re able and willing to lend you money, this can be an easy way to tide yourself over without a formal application process or expectations of paying back interest.
However, money is often tied with emotions, making it incredibly hard to borrow money from a loved one without it affecting your relationship. Being in debt to someone you know personally can bring about feelings of shame and embarrassment.
Lending money is often associated with a shift in power. For example, if you accept a loan from your parents to pay for a wedding, they may only lend it to you under the condition that they get a say in the guest list and the planning process. Additionally, the longer you wait to pay a friend or family member back, the longer you’ll feel indebted to them and the higher tensions can rise.
Pros of Borrowing From a Friend or Family Member
- Less formal than getting a loan
- Expectation of paying interest isn’t likely
Cons of Borrowing From a Friend or Family Member
- Can negatively impact your relationship
- Brings feelings of embarrassment and shame
- Shift in power dynamic
Borrowing Through a Payday Loan
If you are in need of a short-term loan and feel confident that you can pay back the money with your next paycheck, the thought of pursuing a payday loan may have crossed your mind.
Depending on where you live, you can either request a payday loan online or through a physical lending branch. After you’ve been approved and receive the money, you’ll be expected to pay back both the loan and any associated borrowing charges by the due date, which is usually within two weeks or by the time of your next paycheck.
It’s easy to secure a payday loan, as most payday lenders only require an ID, a bank account and a consistent source of income. The biggest downsides are the high APRs, which can be as high as 400%. Additionally, if you’re unable to pay back your loan in full by the due date, most payday lenders will encourage you to roll your debt over into a new short-term loan, which comes with more fees and even higher interest charges.
Pros of Borrowing With a Payday Loan
- Easy to qualify for - bad credit accepted
- Quick to receive funds
Cons of Borrowing With a Payday Loan
- Limited time to pay back
- High APR and fees
- Easy to fall into a cycle and incur more debt
Getting a Personal Loan From a Bank or Credit Union
You may consider going directly to your bank or credit union if you have a good credit history. Working with a brick and mortar location can mean having access to more personalized help with your loan and the application process. If you have a history of working with a particular bank or credit union, you may also have better odds of getting approved for a loan with lower rates and better terms.
There are some banks and credit unions that don’t offer personal loans, so you’ll want to double check what’s available at yours before you get too far. If you’re approaching a financial institution as a brand new client, getting approved for a loan can be more difficult and take more time.
Credit unions and banks typically don’t have a pre-qualification process that can allow you to see potential loan rates and terms. Additionally, costs of operating physical branches might be passed on to customers in the form of higher rates.
Pros of Getting a Personal Loan From a Bank or Credit Union
- Pre-existing clients have higher approval odds and typically receive better terms
- Access to personalized help with the application and loan management processes
Cons of Getting a Personal Loan From a Bank or Credit Union
- May have higher rates due to the costs of running brick and mortar branches
- Strict lending standards and regulations that can make it harder to get approval
- Approval process takes more time
- Usually don’t have a pre-qualification process to see potential rates and terms
Borrow Money from Online Lenders
If you’re looking for speed and convenience, online lending may be right for you. Many of these services allow you to prequalify with a soft credit pull (which won’t alter your credit score) before applying and agreeing to a hard inquiry. It’s also much easier to shop around and compare different lending groups and loans, as well as find lenders who offer bad credit loans.
If you’re not tech-savvy, you may want to stick with in-person lending. Those in need of assistance with their online-only loans often need to wait in line on the phone or in a help chat to speak with customer service representatives.
Due to the nature of online services, you’re more likely to come across untrustworthy websites posing as lenders. The Federal Trade Commission advises consumers to be on the lookout for shady ads and websites that do the following:
- “Guarantee” that they’ll give you a loan before you apply
- Brush off your credit history
- Aren’t registered in your state
- Ask you to wire money or pay an individual person
Pros of Borrowing From Online Lenders
- Speed and convenience
- Can prequalify with a soft credit pull
- Easy to shop around and compare lender and loan options
Cons of Borrowing From Online Lenders
- Scammers often pose as online lenders
- Limited customer service options - no in-person help
Debt Consolidation Loans
One very common reason that people have for taking out a personal loan is to help manage their debts. While they’re often referred to as debt consolidation loans when used for this purpose, the borrowing process is generally the same as that of a personal loan. Once the borrower receives the funds from their loan, they’ll then put that money towards paying off multiple other debts. This allows them to then focus on only paying back one debt.
While this strategy doesn’t reduce the total amount of debt that you may have, it can help combine multiple monthly payments into one. You may also be able to reduce your interest if you have good credit and are able to secure favorable terms and a lower interest rate.
Pros of Borrowing for a Debt Consolidation Loan
- Can help reorganize multiple debts and multiple monthly payments
- May help to secure a lower interest rate
Cons of Borrowing for a Debt Consolidation Loan
- Doesn’t reduce the actual debt that you owe
- May be difficult to secure better terms if you have poor credit
Alternatives to Borrowing
If you’re struggling with debt, borrowing money can turn into an unhealthy cycle. Whether you’ve become a repeat payday loan customer, are shuffling your debt from one creditor to another, or are having difficulty paying back your loved ones, it can be incredibly difficult to break out of debt on your own.
Rather than adding more stress to your finances by borrowing, you may want to consider tackling your debt with the help of a debt relief program. Accredited Debt Relief has helped thousands of individuals across the U.S. break the borrowing cycle by providing customized programs that fit their clients’ needs. We’ve been able to significantly reduce our clients’ overall debts and monthly payments. Learn more today about how Accredited Debt Relief can help you through a free consultation.