No matter if 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 options are and don't know what you should do with it.
For your convenience, we've compiled a list of eight different borrowing options, along with the benefits and drawbacks of each.
Let's go over each option so you'll know what to think about before deciding whether or not borrowing money is the best option for your financial situation.
Taking out a personal loan from a bank may appear to be an appealing option in some situations. For example, some financial institutions provide benefits such as no loan origination fee. An origination fee, which typically ranges from 1 percent to 8 percent, is charged by lenders to cover administrative costs associated with processing your application and disbursing your funds.
If you're an existing customer of a bank that offers this perk, you may also be eligible for an interest rate discount, which is sometimes referred to as a relationship discount. If you keep qualifying bank accounts with certain financial institutions, you may be eligible for discounts on personal loan interest rates.
However, keep in mind that some large financial institutions do not provide personal loans at all. Furthermore, some financial institutions may require you to have a minimum of good or excellent credit in order to be approved for a personal loan.
2. Credit unions (also known as cooperatives)
A personal loan from a credit union may be a better option than a personal loan from a bank in certain situations. Why?
A credit union may be able to provide lower interest rates and fees than a traditional bank. Because credit unions are not-for-profit organizations dedicated to serving their members, their primary goal is to return profits to members rather than to investors.
One disadvantage of joining a credit union is that you must meet the credit union's eligibility requirements in order to join. Some examples of this include having a connection to a specific school or employer, or having a relative who is currently a member of the organization.
3. Lenders on the internet
Online lenders have sprung up as an alternative to traditional personal loans from financial institutions such as banks and credit unions in the digital age.
Online lenders are not burdened with the expenses associated with maintaining physical branches. Furthermore, they frequently provide the user experience that people have come to expect from online loan applications in recent years.
The majority of online lenders guarantee fast funding, with money being deposited into your bank account in as little as one or two business days if you are approved for the loan.
However, if you are unfamiliar with the lender, you should look into its reputation online and inquire with traditional lenders to see if they can offer better interest rates and terms than the lender.
4. Payday loan companies
In the United States, a payday loan is a short-term loan for an amount typically of $500 or less. Payday loans can be applied for either online or in person at a payday loan storefront. The downside of this is that payday loans are an expensive form of financing, and as such, they should only be considered as a last-resort funding alternative.
A payday loan is typically required to be repaid by the next payday following the date of borrowing. State-specific terms and interest rates apply, but a payday lender typically charges a percentage or a fixed dollar amount for each $100 borrowed. For example, according to the Consumer Financial Protection Bureau, a typical scenario involves a fee of $15 per $100 borrowed, which translates into an annual percentage rate of nearly 400 percent for a two-week loan.
Furthermore, if you are unable to pay the loan and fees on time, the lender may extend the payment due date, which will result in the addition of even more fees to the original amount owed.
5. Pawnshops are another option.
A pawn shop loan differs significantly from a traditional personal loan in the following important ways: A pawn loan does not require a credit check or any other application process. The amount of money you can borrow from a pawn shop is determined by the value of the item you're pawning at the time of your request. According to the National Pawnbrokers Association, the average loan from a pawn shop in the United States is $150.
Despite the fact that a pawn shop loan can be a convenient source of cash when you need it, this type of borrowing can be problematic. Interest rates are frequently high — typically ranging from 5 percent to 25 percent — and a variety of fees may be tacked on top of the loan. And if you don't pay back the loan when it's due, the pawn shop may sell the item that you pawned to recoup their losses. Before proceeding with this type of loan, make a list of all your alternatives.
6. Credit card cash advance (also known as a cash advance).
Accessing cash with a credit card can appear to be a convenient and appealing option. It is not necessary to fill out an application or undergo a credit check because you already have the credit card. Instead, you can take out a short-term loan against the available line of credit on your card, which is effectively a short-term loan. Furthermore, you can typically get your hands on the money quickly.
However, the ease of obtaining a credit card cash advance may come at a high cost. Some card issuers charge a fee for cash advances, in addition to a high interest rate, which is typically charged in conjunction with the fee. Furthermore, most credit cards do not provide a grace period for cash advances, which means that interest charges begin to accrue as soon as the money is taken out of your account.
7. Members of one's family and friends
Obtaining a loan from a family member or friend may appear to be a straightforward method of obtaining cash when you are in need. Because, after all, a family loan may come with no contract — or with a very basic contract — and you may be able to obtain a very favorable interest rate even if your credit is less than perfect.
However, if there is a disagreement over the loan repayment, things can become more complicated. What if you still owe Aunt Denise $5,000 in unpaid debt? That can lead to a great deal of embarrassment. Another disadvantage is that because your friend or relative will not be able to report your loan payments to the three major credit bureaus, you will not be able to benefit from credit-building opportunities.
8. Individual retirement account (401(k))
If your 401(k) plan allows loans, borrowing money from your employer-sponsored 401(k) is completely risk-free and does not require a credit check on your part. Tradition dictates that you can borrow up to $10,000 or 50 percent of your vested account balance with a maximum of $50,000, whichever is greater, from your 401(k).
In order to avoid penalties, the loan must be repaid within five years, and the interest you pay on the loan is reinvested in your 401(k) (k).
Even though taking money out of your 401(k) appears to be straightforward, consider the ramifications of doing so. Consider the possibility that you will be forced to repay the loan in full before your next federal tax return is due, if you quit your job. If you are unable to pay back the loan, you may be subject to tax penalties.
In addition, keep in mind that any money you withdraw from your 401(k) will result in you losing out on investment returns (k).
Steps to take next
Whether you require quick cash or a long-term loan, you should take the time to investigate your loan options and ask questions before borrowing money from a financial institution. Here are some important considerations to bear in mind.
- What is the reason for my financial need, and which type of loan best meets that need?
- What is the current rate of interest?
- Is there a fee associated with the loan you're considering?
- Is there a time limit on when I have to pay back the loan?
- What happens if I am unable to make the loan repayments?
- Will a creditor run a hard credit check on me, which will have an impact on my credit scores?
Options for financial assistance in the case of a Coronavirus infection
If you're experiencing financial difficulties as a result of the coronavirus pandemic, you're not alone. Some lenders are offering assistance, and you may be able to get some help with your mortgage, rent, or even utilities if you qualify.
If you're worried about making your next auto loan payment, or if you're having trouble managing credit card debt or student loan debt, you may be eligible for financial assistance during the coronavirus outbreak.
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