When it comes to borrowing money in 2024, there's bad news, and there's good news. The bad news is that loan rejections are on the rise: it is getting harder to borrow money because lenders are tightening their criteria for borrowers. But the good news is that today, there is a greater variety of lending options than ever, covering a full range of needs and creditworthiness.
Borrowers need to get smart on the best ways to borrow money in today's environment, and in this article we list out the top resources for those looking for a loan.
Comparing 10 Ways to Borrow
1) Bank or Credit Union
Although they can have difficult approval requirements, banks and credit unions are among the most common ways to borrow money. Due to their reliability and structure, these institutions have underpinned personal finance for generations. Banks and credit unions require a formal application that evaluates the borrower's credit, income, and financial stability.
An online or in-person application with personal and financial information starts the process. Banks and credit unions offer loans with different terms and conditions. Interest rates vary widely depending on credit score, loan amount, and repayment term. These rates affect your repayment plan and can be fixed or variable.
Repayment terms matter, too. They can last several months to years, affecting monthly repayment and loan interest amounts. A good credit score and stable income are often required for approval.
Pros
- These institutions have a long-standing history of offering standard and trustworthy borrowing options.
- Banks and credit unions provide diverse loan types to suit different needs.
Cons
- Approval often requires a good to great credit score and a stable income.
- The application process can be lengthy and paperwork-intensive.
- Terms and conditions may be less flexible compared to some alternative options.
2) Online Personal Loan
Online lenders make personal loans more accessible. These platforms simplify loan applications and often expedite funding. Filling out a lender's online application with your personal and financial information can sometimes take only a few minutes of your time.
Being able to easily compare rates and terms from multiple lenders is a significant benefit of online loans. Researching interest rates, loan terms, and fees is crucial. Understanding the terms and conditions can help you avoid unexpected charges or terms that could hurt your finances.
When doing your research, consider origination, prepayment, and late payment fees, as well as the trustworthiness of the loan provider. Online loans can meet various financial needs, from small, short-term loans to large, long-term loans. However, you should borrow from reputable lenders and ensure the loan terms fit your financial needs and goals.
Pros
- Simplified online application process with faster funding.
- Can cater to various financial needs, both short and long-term.
- Easy to compare rates across different online personal loan providers.
Cons
- Many loan companies compete for your attention; some are better than others, and some might be outright scams. Being careful to borrow from reputable lenders is important.
- Understanding terms is crucial to avoid unexpected financial burdens.
3) 401(k) Loan
Many people can borrow from their 401(k). This method often lets you borrow up to half of your vested account balance or the plan's maximum from your retirement funds. One of the main benefits of a 401(k) loan is its low-interest rate, usually around prime, and the fact that you can repay yourself directly into your retirement account.
There are drawbacks, though, as you're decreasing your potential retirement savings. Borrowing money can cause a long-term financial disadvantage since the borrowed amount generates no investment returns.
401(k) loans can also carry their own risks and penalties. Full loan repayment may be required upon leaving employment, resulting in a taxable distribution. In some cases, you may also incur a 10% early withdrawal penalty if you are under 59½, so doing your research before dipping into your 401(k) for a loan is crucial.
Pros
- Typically offers a low-interest borrowing option.
- Interest paid might go back into your retirement account.
Cons
- Borrowed money doesn't earn investment returns, impacting long-term savings.
- Full repayment may be required upon leaving employment.
- Some programs will incur early withdrawal penalties if you're under a certain age.
4) Buy Now, Pay Later
"Buy Now, Pay Later" (BNPL) services have surged in popularity in the past few years, revolutionizing how consumers approach purchases. You've probably seen or heard of services such as Affirm, Klarna, Afterpay, and Perpay. Even companies like Apple, PayPal, and Amazon are now offering their own BNPL online payment options too. Often integrated into online and retail checkout processes, these services allow customers to defer payments, typically splitting costs into smaller, interest-free installments without needing to apply for a loan.
The allure of BNPL lies in its ease of use and instant gratification, enabling consumers to shop without the burden of the total cost all at once.
However, while BNPL services can be convenient, they come with caveats. Some plans may charge interest or fees if repayments are not made on time, and the ease of accruing purchases can lead to debt accumulation if not managed responsibly.
Users must understand the terms of each BNPL service, including potential late fees and the impact on credit scores. As with any credit facility, managing repayments effectively is critical to avoiding financial pitfalls.
Pros
- Purchasing without full immediate financial strain or complicated application processes.
- Splits payments into smaller, interest-free installments.
- Convenience: integrated into online and retail checkout processes for ease of use.
Cons
- Some plans may charge fees if repayments are delayed.
- Easy to overuse.
5) Personal Line of Credit
A personal line of credit is a flexible borrowing option that differs significantly from a traditional loan. Unlike a loan that provides a lump sum upfront, a line of credit offers access to funds up to a specific limit, which can be drawn upon as needed. This flexibility makes it an attractive option for ongoing expenses or as an emergency fund.
Interest is only paid on the borrowed amount, not the entire credit line. However, these lines often come with variable interest rates, which means the cost of borrowing can fluctuate over time. Borrowers need to be aware of these rates and any associated fees.
A personal line of credit requires discipline; the ease of accessing funds can lead to overspending, and managing repayments is crucial to maintaining financial stability.
Pros
- Access to funds up to a specific limit is practical for ongoing expenses or emergencies.
- Interest is paid only on the amount used, not the entire credit line.
Cons
- Rates and fees can fluctuate over time, affecting borrowing costs.
- The ease of access may lead to overspending and financial strain.
6) Home Equity Financing
Home equity loans and lines of credit (HELOC) are secured borrowing methods that leverage the equity in a borrower's home. Equity is the difference between the home's market value and the outstanding mortgage balance. While home equity loans provide a lump sum with fixed repayment terms, home equity lines of credit offer flexible access to funds with variable interest rates. These financing options typically offer lower interest rates than unsecured loans, making them attractive for large expenses like home renovations or debt consolidation.
However, both require careful consideration of the borrower's financial situation and long-term goals, as the stakes are high with home equity financing. The borrower's home serves as collateral, meaning failure to repay the loan can result in foreclosure. HELOCs can be a great option for the right candidate, but homeowners need to consider this risk and ensure they have the means to manage repayments.
Pros
- Typically offers lower rates for large expenses due to collateralization.
- Suitable for significant expenses like home renovations or debt consolidation.
Cons
- Because the home serves as collateral, failure to repay can lead to heavy consequences.
- Must ensure capability to manage repayments to safeguard home equity.
- Home equity lines may have variable interest rates, adding potential complexity and higher borrowing costs.
7) 0% APR Credit Cards
A 0% APR credit card is a unique financial tool offering an interest-free period, typically 6 to 18 months. This type of credit card can be an excellent option for interest-free borrowing, provided the balance is paid off within the specified timeframe. It's ideal for consolidating debt or making large purchases you plan to pay off quickly.
However, it's crucial to understand the implications of not adhering to the terms. Once the interest-free period expires, any remaining balance is subject to the card's standard interest rate, which is sure to be higher than other loan options, such as a 401(k) loan. Also, late payments or exceeding the credit limit can result in penalties and damage your credit score. It's essential to use these cards responsibly and have a clear plan for repayment within the interest-free window.
Pros
- Great for consolidating debt or making planned large purchases.
- Easily accessible and integrated into spending routines.
Cons
- High standard interest rates apply if not paid off within the interest-free period.
- Late payments or exceeding the credit limit may incur penalties, as with any credit card.
- Mishandling can negatively affect credit scores.
8) Instant Loan & Cash Advance Apps
Mobile loan apps have become convenient sources for obtaining quick, small loans up to $750. These apps offer a streamlined process, allowing users to apply for and receive loans directly from their smartphones. They are handy for immediate cash needs and bridging paychecks when traditional borrowing options are not available.
However, users should be cautious. Many cash advance apps come with their own cost and fees. Look for reviews, compare prices and fees, and be aware of loan speeds, which typically take a few days or may incur additional fees to expedite the deposit.
While loan apps can provide quick financial relief, they should be used responsibly to avoid falling into a debt trap.
Pros
- PSimplified application process compared to traditional borrowing options.
- Instant loan apps can offer flexibility between paychecks.
Cons
- The highest loan amounts are usually offered after repayment history has been established.
- Each app has its own cost structure and fees, increasing the need to shop around.
- Requires thorough research to understand total borrowing cost.
9) Public Agencies
Public agency loans can be an essential lifeline for those pursuing higher education or funding a new business. They are easier to get and have lower interest rates than bank loans. Government departments and non-profits help individuals achieve their goals while promoting social and economic development.
Find these loans by researching government websites, educational institutions, or non-profits that meet your needs. Government education departments offer student loans, while local economic development agencies provide small business loans.
Residency, income, and loan purpose are standard eligibility requirements for these loans. The loan application may require detailed documentation and a clear demonstration of use. Understand the terms and conditions, including repayment obligations and how the loan may affect your finances.
Pros
- Help individuals and businesses achieve goals while promoting development.
- Available through government departments and non-profits for eligible purposes.
Cons
- Specific residency, income, and usage requirements may limit accessibility.
- May require detailed documentation and a clear demonstration of use.
- Understanding obligations and their impact on personal finances is crucial.
10) Loans From Family or Friends
It's common to borrow money from family or friends, who may offer greater flexibility and repayment terms than an institution. However, this approach mixes delicate and complex personal relationships with finances.
You must treat the loan like a formal financial arrangement to succeed. Establishing clear loan terms like the principal amount, interest rate, repayment schedule, and penalties for non-compliance is necessary to keep the "business" and personal sides of the arrangement separate. This agreement should be written to make sure everything is clear.
Consistent communication about finances and loan repayment issues can help maintain confidence. Remember that while a loan from family or friends may seem essential in an emergency, it may damage relationships. Before proceeding, ensure both parties are comfortable with the arrangement and understand its terms.
Pros
- It is a more relaxed process compared to formal borrowing.
- Can deepen relationships through trust and support.
Cons
- Potential strain on relationships.
- Lenders are typically more experienced at creating clear terms and repayment schedules than friends and family.
11) Peer-To-Peer Lending
Peer-to-peer (P2P) lending is a new financial model in which apps or platforms bypass banks by directly connecting borrowers to individual investors willing to finance loans. By eliminating the intermediary, this approach may offer lower interest rates and more flexibility than bank loans. The largest P2P lenders include Lending Club and Prosper while newer app-based lenders that offer smaller loans include SoLo Funds and Lenme.
P2P lending has several benefits, including a simplified application process and access to funds unavailable through traditional channels. However, understanding the risks is essential. To verify the platform, loan terms, interest rates, and fees, borrowers must do extensive due diligence.
Credit checks, loan approvals, and terms on P2P lending platforms may differ from conventional loans. Before making any financial decision, you must understand the terms and assess your ability to repay the loan.
Pros
- It can offer lower interest rates compared to traditional bank loans.
- Streamlined application process with access to funds not available through banks.
- Peer-to-peer allows direct connection between borrowers and investors and a wider range of approval criteria.
Cons
- Terms and requirements may differ significantly across platforms and lenders, requiring a higher degree of research.
How To Understand Your Borrowing Needs
Before considering borrowing money, it is key to under your goals and financial situation. This self-evaluation will assist you in finding the best option.
Take into consideration the subsequent factors:
- Loan Purpose: Clearly define why you need the loan. Is it for a one-time expense, like a home renovation, or ongoing costs like education? The purpose can significantly influence the type of loan that's best for you.
- Amount Needed: Determine the exact amount you need to borrow. Borrowing more than necessary can lead to unnecessary debt while borrowing too little might not meet your needs.
- Repayment Capacity: Assess your financial situation to understand how much you can repay monthly. Consider your income, expenses, and any existing debts. This will help you avoid overextending yourself financially.
- Urgency of Funds: Evaluate how quickly you need the funds. Some loans, like online loans or loan apps, can be processed quickly, while others, like bank loans, may take much longer.
- Financial Health: Review your credit score and financial history. Building your credit can give you access to loans with better terms and lower interest rates.
How To Compare Borrowing Options
Comparing different lender reviews and offers is a critical step in the borrowing process. Here's a checklist to help you evaluate each option:
- Interest Rates: Compare each loan's annual percentage rates (APR). A lower APR generally means a lower cost of borrowing.
- Fees: Look out for additional fees, such as origination fees, prepayment penalties, or late payment fees. These can add to the cost of the loan.
- Repayment Terms: Consider the length of the loan and the repayment schedule. Longer terms mean lower monthly payments but more interest over time.
- Lender Reputation: Research the lender's reputation. Read reviews and check their standing with financial regulatory bodies. Confirm they're legitimate.
- Flexibility: Assess the flexibility of the loan terms. Can you make extra payments without penalties? Is there flexibility in case of financial hardship?
- Total Cost of Borrowing: Calculate the total amount you will pay over the life of the loan, including interest and any fees.
- Eligibility Requirements: Ensure you meet the eligibility criteria for the loan, such as income requirements or credit score thresholds.
Bottom Line
Traditional bank loans, online personal loans, peer-to-peer lending, instant loan apps, and personal lines of credit have created a broad range of ways to borrow money. There is likely a solution for almost everyone who puts in the effort to research what is best for them.
To do that, remember your short- and long-term goals, assess your financial situation, and shop for the best loan offer by comparing terms, interest rates, fees, and lender reviews.
Your financial (and mental) well-being depends on the appropriate borrowing method you choose as you move forward. Borrowing in a way that's right for you can get you where you need to go, while choosing the wrong option can drive more cost and stress than you've signed up for.
Frequently Asked Questions
What is the best way to borrow money?
The best way to borrow money depends on credit score, financial stability, and loan purpose. A personal loan from a reputable bank or credit union with low interest rates and suitable terms is usually best. You must compare options and understand terms and conditions before committing.
What is the safest way to borrow money?
A bank or credit union is the safest place to borrow money because loans are regulated and have clear terms. Formal agreements and repayment structures reduce the risk of predatory lending and unclear terms at these institutions. Well-known online lenders, like SoFi.com are often the next best option.
What is the easiest way to borrow money?
Easy ways to borrow money include credit cards and online loan apps offering quick applications and instant funds. However, this convenience may come with higher interest rates and fees, so it's essential to understand the terms and be able to repay the loan quickly.
What is the fastest way to borrow money?
Online lenders or loan apps can provide instant decisions and same-day funding, making them the fastest way to borrow money. Quick-access loans are convenient for urgent financial needs but may have high interest rates and fees.
What is the cheapest way to borrow money?
Home equity and credit union loans with low APRs are the cheapest ways to borrow money. These loans have lower interest rates than others but may require good credit or collateral. Another option to consider are 401(k) loans, which tend to have low interest rates but may limit the returns of the investment account being borrowed against.
What is the worst way to borrow money?
High-interest loans with unfavorable repayment terms are the worst ways to borrow money. Due to their high rates and difficult repayments, these can trap people in a cycle of debt, especially those in financial trouble.
