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Whether you’re trying to scrape together money to take a vacation, consolidate credit card debt or pay for a wedding, finding the best place to borrow money might feel as overwhelming as picking the perfect bridal gown.
Fortunately, there are a number of borrowing options. Aside from a traditional bank, some borrowing options include a credit union, online lender, payday or car-title lender, pawn shop, credit card, a friend or family member and a 401(k) retirement account.
But not all of these options are for everyone. For example, you might not own valuables to pawn, or you might not have a 401(k).
Plus, each of these eight options has its own advantages and disadvantages. Let’s delve into what to consider before you decide where, or if, to borrow money.
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, which often ranges from 1% to 8%. This loan origination fee usually covers the lender’s administrative expenses for processing your application and paying the money to you.
You also may 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. Banks like Wells Fargo and Citizens Bank offer loyalty discounts on the interest rate if you maintain qualifying bank accounts and enroll in automatic payments.
But keep in mind that some big banks, like Bank of America and Chase, don’t offer personal loans. And some banks may require you to have good or excellent credit to get approval for a personal loan.
2. Credit unions
A personal loan from a credit union might be a better option than a personal loan from a bank. Why?
For one thing, a credit union may offer lower interest rates and fees than a bank. Since credit unions are not-for-profits dedicated to serving members, their goal is to return profit to members instead of shareholders.
One drawback: You must meet a credit union’s membership 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 aren’t tied down by 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. An efficient funding process and easy-to-navigate online applications are crucial for customer satisfaction, according to a press release by J.D. Power.
Many online lenders promise fast funding, with money deposited into your bank account in as soon as one or two business days if you’re approved.
But if it’s not a lender you’re familiar with, research its reputation online and check with traditional lenders to see if they can offer better interest rates and terms.How to find the best personal loan for your needs
4. Payday lenders
A payday loan is typically 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 near you. Keep in mind that payday loans are an expensive form of financing, and if possible, consider other funding options.
A payday loan typically must be repaid by your next payday. 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 a borrower is unable to pay the loan and the fees, the lender might be permitted to extend the 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 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 provide 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
Borrowing money from your employer-sponsored 401(k) requires no credit check. And if your 401(k) plan allows loans, you can borrow $10,000 or 50% of your vested account balance, whichever is greater, though the cap on 401(k) loans is $50,000.
You must repay the 401(k) loan within five years, and the interest you pay on the loan goes back into your 401(k).
Although 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 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 reports?