Most people need to borrow money at some stage of their life, whether it’s to fund an emergency, pay for an unexpected bill or indulge in a special item. With the average American having $90,460 in debt in 2019, it is unsurprising that consumers look to many different ways to get access to funds.
So what are the best ways to borrow money? Dollar Hand presents some of the most popular options below:
Borrowing from family and friends
Lending money between family and friends is an extremely common practice, with 53% of Americans borrowing from or loaning cash to a loved one in 2020. This can be seen as a sensible way of obtaining cash since it won’t have any impact on your credit rating, and it is likely that someone close to you would want to help you avoid any high interest that would come with alternatives such as a loan.
Since there are certain stigmas attached to asking friends or family for money, it is essential to make sure that you will be able to repay the funds. It is also advisable to put your loan agreement in writing. It should include the amount you are borrowing, the interest being charged (if there is any), as well as the repayment due dates. This will avoid any uncomfortable situations between the two parties and prevent any strained relationships.
Getting a personal loan
Personal loans are a particularly common method used to borrow money, with 51.3% of Americans stating in 2021 that they have taken out a personal loan during their lifetime. They are typically unsecured loans from an online lender, credit union or a bank.
In particular, banks tend to offer competitive annual percentage rate (APR) for doing this, with loan amounts up to $50,000 or even more. Better yet, those who are already a customer with the bank may receive an additional APR discount and there are usually flexible repayment options. However, it is difficult to get approved through a bank if you have a poor credit score, so those with bad credit could look at credit unions which may offer lower rates in this case.
Online lenders are also useful since they cater to a variety of financial histories and are known to approve loans quickly. They also do a soft credit check with pre-qualification, meaning you can shop around to find the best rate without impacting your credit rating.
Getting a secured loan
Secured loans allow customers to borrow money whilst using their home as collateral. This means the lender can sell the borrower’s property if they fail to meet repayments.
Since there is less risk for the lender, secured loans mean borrowers can usually take out larger amounts for a longer period than if they opted for an unsecured loan. It is also useful for those with poor credit as they are more likely to be approved under this type of agreement.
Nevertheless, this form of borrowing money should not be considered lightly since the lender can repossess your home to recover debt if you do not pay the loan amount back. Getting a secured loan so that you have more time to pay it back may also lead you to pay more interest overall since it is charged monthly.
Using a credit card
Signing up for a low-interest credit card could be a good way of borrowing money. A 0% APR credit card is one of the cheapest ways to borrow money providing that you can pay off the balance within the card’s designated period. However, you will usually need good credit or better to qualify for a credit card with a low interest rate.
If you already have a credit card, you can use it instantly to pay for purchases. However, you must make sure you pay back as much as you can to keep costs down. It’s also important not to be tempted to spend more than you need to or can afford.
Credit cards can also be used for cash advances whereby you withdraw cash. However, this is not advisable since you’ll be paying interest from the day of the withdrawal, even if you pay the bill off in full. You might also be charged at a higher rate of interest than with purchases.
Buy Now Pay Later
Buy Now Pay Later companies allow consumers to purchase items now and then repay them back over a series of installments, usually without interest – however, some may charge a fee for late payments. It offers an affordable way to borrow money for necessary purchases, providing that customers don’t get tempted to overspend using it.
The service is often offered by retailers during an online checkout process and sometimes is even available in-store. Examples include well-known Swedish brand Klarna, Afterpay, Laybuy and more. For more information check out our guide on ‘What is Buy Now Pay Later and How Does It Work?’
Asking your employer
Many large companies have systems in place to offer financial support to their employees if they need it. Options may include paycheck advances or interest-free, low-cost loans. Repayments might be taken out of the employees next paycheck or drip fed out of multiple paychecks over time.
Financial assistance schemes were particularly common during the COVID-19 pandemic and are designed to help loyal members of staff if they need extra money for important expenses such as medical bills or funeral costs. This option provides a reassuring form of borrowing as it is good to know that there is assistance available if you need it.
Using a credit union
Joining a credit union could be a viable option as the financial institutions are committed to serving their members through competitive rates. Fees are often cheaper than banks or are even nonexistent.
Due to their community-based ethos, credit unions may also have more relaxed lending standards for their personal loans, making it easier to borrow money if you don’t have a perfect credit score. Credit unions personal loans could also potentially be a more affordable way to borrow money since federal credit unions cap APRs at 18% for most loans.
Whilst payday loans are typically known to have high interest rates, they provide a simple and speedy way of borrowing money, especially in emergency situations when you are in desperate need of fast cash. They are short-term loans that are typically paid back once borrowers receive their next paycheck.
Payday loans offer quick access to money and bad credit options too. However, failing to meet repayments can lead to extensive fees. It is therefore essential to only borrow money in this way if you know you will be able to pay it back on time.
Look into an authorized overdraft
If you have a current account, you might be able to access an authorized overdraft from your bank. Whilst there are some interest-free overdrafts, others can be expensive. Nevertheless, going into an authorized overdraft can still be cheaper than taking out a payday loan.
This can be a good borrowing route providing that you stay within the overdraft limit. Slipping into an unauthorized overdraft could be very costly and lead to money difficulties.
Selling items that you don’t need
An easy way to get access to money is to look through all of your belongings and clothes and sell any unwanted items that you no longer need. This can easily be achieved online through reputable platforms such as eBay, Facebook Marketplace or Craigslist. Alternatively, you could hold a garage sale.
Handy Tips to Consider When Borrowing Money
Before choosing which borrowing method you want to go with, you should:
- Shop around and research all the different options available. Consider the interest and fees involved, how long you have to pay back the borrowed money and what happens if you cannot repay the funds on time.
- Work out your budget and ensure you choose the service you can afford to pay back.
- Check if the provider will perform a hard credit check which could affect your credit score.
- Think about whether you definitely need to borrow money. Do not make the decision in the spur of the moment and be careful about borrowing money to pay off existing debts.
- Be careful if you sign up to interest free deals as they are only interest free if you pay them off within a certain time frame. If you fail to pay them off within the expected dates, then you could face very high interest rates.
How To Manage Borrowed Money
Whether you’re borrowing money from your sister, friend, a credit union or a lender, it is essential to make timely payments – even if you won’t be charged interest fees. Managing borrowed money responsibly can be achieved by:
- Only borrowing an amount you can comfortably repay.
- Committing to timely payments each month.
- Keeping an eye on your budget and reducing your daily expenses if you are struggling to make repayments.
- Letting your lender know straight away if an unexpected situation arises and you anticipate making a late payment or are struggling to meet the loan obligations.
Justine is a full-time writer with lots of expertise and a wealth of experience in the financial world. In particular, she specializes in household income and consumer finance across the United States. Follow her articles for useful advice and top tips, guides on how to save money and lots more.