By knowing where to look for good loans and what traps to avoid, you can find the best ways to borrow money.
Look for low interest rates, limited fees and payment flexibility to score the best deal. Credit unions and some online lenders offer competitive rates. Other options like loans from public agencies and borrowing from your 401(k) can give the cheapest deal if you meet the eligibility criteria.
Compare multiple options to choose the one that fits your budget and is able to fund you at the lowest rate you qualify for.
Key takeaways
- Banks, credit unions and online lenders are top ways to borrow.
- Lenders offer both secured and unsecured options.
- Avoid high interest rates by comparing at least three options.
Bank or credit union personal loan
Banks and credit unions are two types of financial institutions that offer personal loans. The main difference between the two is that banks are for-profit institutions and credit unions are not-for-profit institutions. This typically means that credit unions invest the profits back into benefits for members, like better rates and lower costs for services.
Both banks and credit unions typically cater to those with good credit scores — a FICO 670 or higher. Since credit unions are not-for-profit, they can usually offer the best rates, but if you aren’t already a member, you may need to pay a fee to become one.
Larger banks and federal credit unions often have online applications for personal loans. But local banks and credit unions may require you to apply in-person at your local branch. Applying for a personal loan at a bank or a credit union is a great option if you have an established account and good credit history.
Pros:
- Work with a team in-person at your local branch.
- Application process is often straightforward and simple.
Cons:
- Open checking or savings account may be required.
- Must have a high credit score to qualify.
Online personal loan
Online lenders don’t have physical branches, which makes them one of the quickest options. It typically only takes a few minutes to apply, and many have customer service representatives available via phone or chat to help answer any questions.
When you apply for a personal loan with an online lender, it’s easy to shop for different lenders quickly and find the best rates. There are typically more options for consumers with lower credit scores than with other types of lenders. Some even cater to credit scores as low as 560.
Pros:
- Quick and easy to apply.
- Can research loan options from your computer.
- Options available for lower credit scores.
Cons:
- No in-person customer service.
- Less room to negotiate rates and terms than a traditional lender.
0% APR credit card
Some credit cards, known as zero percent APR credit cards, offer introductory periods with no interest accrual. The introductory period usually lasts anywhere from 6 to 21 months. Within this period, you can spend within your credit limit without paying interest.
This sounds great, but it’s not the best idea for everyone. If you don’t have a plan to pay off your credit card within the introductory period, you may be faced with a hefty interest rate after the period ends. It’s a huge risk to borrow money this way if you don’t know how you will pay it off.
It is also difficult to qualify for a credit card with a zero percent interest rate. There are other low-interest credit cards you may want to consider if you aren’t able to qualify for a zero percent APR card.
Pros:
- Pay no interest during the introductory period.
- Flexible for spending as your needs change.
Cons:
- Missing payments may mean you forfeit the introductory period.
- Difficult to qualify for most offers.
- Interest rates may be high outside the introductory period.
Margin account
A margin account is a brokerage account where the broker-dealer lends cash to the investor using the account as collateral. Any rise in the stock bought is a gain but any fall is a loss.
For example, let’s say you invest $25 and the broker lends you $25 to invest a total of $50. If the price of the stock goes up from $50 to $60, you gain $10, meaning you now only owe $15. But if the price of the stock goes down to $40, you owe a total of $35.
A margin account can also be used for a loan to cover non-investment costs over a short period of time. Whatever way you use a margin account, you will also have to pay interest on whatever you borrow. Borrowing using a margin account can result in a gain if the securities invested increase in value, but it can also result in greater debt if they decrease in value.
Pros:
- Pay back your debt by selling securities or paying back cash.
- Rates are typically lower compared to other borrowing options.
- No additional fees to pay compared to other loan types.
Cons:
- Interest rates may change.
- Potential for increased debt if the value of securities drops.
Peer-to-peer lending
Peer-to-peer (P2P) lending is a way to connect individual lenders with individual borrowers. P2P lending sites like Prosper facilitate loans and act as an alternative to a traditional bank loan. These types of lenders operate online, similar to online lenders, and the application process can typically be completed in just a few minutes.
P2P loans typically have more options for borrowers and will approve loans to those with lower credit scores. While traditional banks require a credit score of at least 670, P2P lenders often have a minimum credit score requirement of 600.
However, P2P loans are more expensive. They often have more fees than banks. In addition to a higher interest rate, expect origination fees and administrative fees that reduce the total amount you are able to borrow.
Pros:
- More options for borrowers with lower credit scores.
- Quick online application — but sometimes slower funding speeds.
Cons:
- No in-person customer service.
- Not legal in every state.
- Potential for high fees and slow turnaround.
401(k) loan
A 401(k) loan allows you to borrow from your retirement savings account. Unlike a withdrawal, there is no penalty for taking a loan out from your account. And the interest you pay on the loan goes right back into your retirement account.
Each retirement plan has slightly different rules for 401(k) loans, though they may allow you to borrow up to 50 percent of your savings. You typically have to pay back the loan within five years, and depending on your plan, you may only be able to take out a loan a certain number of times.
Pros:
- The interest you pay goes back into your account.
- You don’t have to pay a withdrawal penalty.
Cons:
- You miss out on potential growth during the loan term.
- If you leave your job, you may have to repay your loan quickly.
Personal line of credit
A personal line of credit is often unsecured and works similar to a credit card. You pay back what you borrow with interest. And as you repay, you are able to borrow again — up to your credit limit. However, lines of credit often have lower interest rates than a credit card, which makes them a good choice for frequent spending.
Banks and credit unions typically approve personal lines of credit for those who already have a checking account.
A personal line of credit isn’t a great long-term borrowing plan, as you can only continue borrowing during the draw period, which typically lasts two years. After this, they enter a repayment period similar to a personal loan, so lines of credit are best for short-term but irregular expenses.
Pros:
- Reuse the line of credit as you pay it back.
- Only pay interest on the amount that you borrow.
Cons:
- Lenders may charge additional fees on top of interest.
- High credit score typically required.
Buy now, pay later
The buy now, pay later model allows you to finance your purchase and pay it back in set installments. Companies like Uplift and Affirm partner with thousands of retailers to offer you the option to buy something now and pay it back on your terms. You make a small down payment, usually 25 percent of the full price, and pay the rest back like a term loan or credit card.
Although some options have no interest, others do charge interest on your purchase, so it’s important that you understand what you are getting into. Buy now, pay later works well for immediate, emergency purchases you can’t put off. But interest rates on longer repayment plans for purchases can be similar to or higher than other loan types, making them an expensive choice if you aren’t able to repay quickly.
Pros:
- No interest if you pay off your purchase in four installments.
- No late fees or other hidden fees.
- Doesn’t impact your credit score if you make your payments on time.
Cons:
- Can only be used with retailers that partner with the companies.
- Some payment plans have interest rates as high as 15 percent.
Public agencies
Public agencies, such as the government or nonprofits, typically have programs and loans to help out during financial emergencies. The exact programs available to you will depend on where you live. You can contact your local government or look to national government agencies to find out which types of loans might be available to you based on your needs.
Borrowing from public agencies typically has much more specific requirements, but this type of loan also usually has better terms. Some loans may even have zero percent interest rates. While applying for any public or nonprofit funding can be a lengthy process, it is often one of the best ways to avoid high fees and interest rates.
Pros:
- Typically have low or no interest rates.
- May not check your credit history.
Cons:
- May have specific income or residence requirements.
- Applications often require more information.
Bottom line
If you are looking for the cheapest option to borrow money, you should apply for a variety of these options and see which offers the best rates. It may be time consuming, but it can help you find the right option for your budget. Consider your reason for borrowing money and shop around with different lenders and different types of loans to compare what they have.
Frequently asked questions
There are predatory lenders out there if you need quick funding. Any loan with high interest rates or numerous fees should be avoided. One of these worst ways to borrow money are payday loans, but any short-term option can be expensive and difficult to repay.
Many lenders are able to fund a loan within one to two business days. Other options — like buy now, pay later — fund your purchase immediately.
There are secured and unsecured options for nearly every way to borrow money. Depending on the lender and your finances, you may be required to provide collateral. However, credit cards, personal loans and lines of credit frequently have unsecured options available to their borrowers.
Not every lender is trustworthy. It’s important to do your research on any lender. Research their ratings through the Consumer Financial Protection Bureau (CFPB) to see if they have a lot of credible complaints against them. Just because a lender looks credible doesn’t mean they are. You can avoid traps like high interest rates and hidden fees by researching lenders before you sign any agreements.
