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Whether you’re looking for extra cash to consolidate credit card debt, pay a medical bill or take a vacation, it can be stressful if you don’t know what your choices are.
We’ve rounded up eight different borrowing options, along with the advantages and disadvantages of each.
Let’s walk through each option so you know what to consider before you decide if borrowing money is right for your financial situation.
- Credit unions
- Online lenders
- Payday lenders
- Pawn shops
- Cash advance from a credit card
- Family and friends
- 401(k) retirement account
Taking out a personal loan from a bank can seem like an attractive option. For example, some banks offer perks like no loan origination fee. An origination fee often ranges from 1% to 8% — lenders say it covers administrative expenses for processing your application and paying you the money.
You may also qualify for an interest rate discount — sometimes referred to as a relationship discount — if you’re an existing customer at a bank that offers this perk. Some banks offer loyalty discounts on personal loan interest rates if you maintain qualifying bank accounts.
But keep in mind that some big banks don’t offer personal loans at all. And some banks may require you to have a minimum of good or excellent credit to get approval for a personal loan.
See our picks for the best personal loans from banks.
2. Credit unions
A personal loan from a credit union might be a better option than a personal loan from a bank. Why?
A credit union may offer lower interest rates and fees than a bank. Since credit unions are nonprofits dedicated to serving their members, their goal is to return profit to members instead of shareholders.
One drawback is that you must meet a credit union’s eligibility requirements in order to become a member. This can include residence in certain counties, a connection to a specific school or employer, or family ties to a current member.
3. Online lenders
In the digital age, online lenders have sprung up as an alternative to traditional personal loans from banks and credit unions.
Online lenders don’t have the costs that come with maintaining physical branches. And they often offer the user experience that people have come to expect from digital loan applications.
Many online lenders promise fast funding, with money deposited into your bank account in as little as one or two business days if you’re approved.
But if you’re not familiar with the lender, research its reputation online and check with traditional lenders to see if they can offer better interest rates and terms.
Check out our picks for the best online personal loans.
4. Payday lenders
A payday loan is a short-term loan for an amount that’s typically $500 or less. You can apply for payday loans online or at a payday loan storefront. But payday loans are an expensive form of financing, and because of that they should only be considered a last-resort funding option.
A payday loan typically must be repaid by the next payday after borrowing. Terms and rates vary by state, but a payday lender usually charges a percentage or dollar amount for each $100 borrowed. The Consumer Financial Protection Bureau says a common scenario is a fee of $15 per $100 — that works out to an annual percentage rate of nearly 400% for a two-week loan.
And if you’re unable to pay the loan and the fees, the lender might extend the payment due date, adding even more fees to the original amount owed.
5. Pawn shops
A pawn shop loan differs from a traditional personal loan in a critical way: A pawn loan involves no credit check or application process. The amount of money you borrow from a pawn shop is based on the value of the item you’re pawning. The average pawn shop loan in the U.S. is $150, according to the National Pawnbrokers Association.
While a pawn shop loan can be a quick source of cash when you need money, this form of borrowing can be problematic. Interest rates are often high — commonly ranging from 5% to 25% — and various fees might be tacked on. And if you fail to pay off the loan when you’re supposed to, the pawn shop can sell the item you pawned. Consider all your options before proceeding with this kind of loan.
6. Cash advance from a credit card
Using a credit card to access cash can seem like an appealing option. Since you already have the card, you don’t have to fill out an application or go through a credit check to get what essentially is a short-term loan against the line of credit available on your credit card. Plus, you can typically access the money quickly.
But the simplicity of a credit card cash advance can come at a price. Some card issuers charge a fee to get a cash advance along with an interest rate that’s usually high. Also, most credit cards don’t offer a grace period for cash advances, meaning that the interest charges start the moment you withdraw the cash.
7. Family and friends
Getting a loan from a family member or friend may seem like an uncomplicated way to get cash when you need it. After all, a family loan might come with no contract — or a basic contract — and you might get a very favorable interest rate even without excellent credit.
But things can get complicated if a dispute arises over repayment of the loan. What if you still owe $5,000 to Aunt Denise? That can cause a lot of awkwardness. Another drawback: Since your friend or relative can’t report your loan payments to the three major credit bureaus, you won’t reap any credit-building benefits.
8. 401(k) retirement account
If your 401(k) plan allows loans, borrowing money from your employer-sponsored 401(k) requires no credit check. Traditionally, a 401(k) loan allows you to borrow up to $10,000 or 50% of your vested account balance with a cap of $50,000, whichever is greater.
The loan must be repaid within five years, and the interest you pay on the loan goes back into your 401(k).
Though accessing cash from your 401(k) sounds simple, consider some of the consequences. For instance, if you leave your job, you could be forced to repay the loan in full before your next federal tax return is due. If you can’t repay the loan, you might be hit with tax penalties.
And don’t forget that you’ll be missing out on investment returns on money you pull out of your 401(k).
Whether you need fast cash or a long-term loan, you should take the time to research loan options and ask questions before you borrow money. Here are some key questions to think about.
- Why do I need the money, and which type of loan best fits that need?
- What is the interest rate?
- Are there any fees associated with the loan?
- How long do I have to pay back the loan?
- What happens if I can’t pay back the loan?
- Will a creditor perform a hard credit check that will affect my credit scores?
Coronavirus financial relief options
If you’re feeling strapped for cash because of the coronavirus pandemic, you’re not alone. Some lenders are offering help, and you may have some relief options for your mortgage, rent or even utilities.