It is usually better to pay unexpected expenses with your emergency funds than to borrow money. so you may need to turn to other resources.
Be aware that not all types of borrowing are equal and have different financial risks. You can’t get the lowest rate or need money quickly so make sure you carefully review your options and weigh the risks.
The cheapest way to borrow money
Borrowing is always expensive. However, there are some types of loans that can be more affordable if you have excellent credit (FICO 690 or greater). These are the best options.
1. A personal loan from a bank/credit union
For personal loans, banks and credit unions usually offer the lowest annual percentage rates or total cost of borrowing. The loan amount can range from a few hundred to $50,000.
You may be eligible for an additional APR discount if you are a bank customer. Flexible payment options are another benefit offered by some banks to help you manage financial uncertainty.
It’s difficult to get approved by a bank if you don’t have a good credit score. A few banks won’t let you prequalify to see the rate and terms of your loan. Online lenders are more likely to offer this option.
Credit unions might offer lower rates than banks, particularly for people with poor credit.
Lenders may look at your financial picture rather than relying on your creditworthiness. Before applying, you will need to be a member of a credit union.
Also read: What is Loan Management System: A Complete Guide
2. 0% APR credit card
If you are able to pay the balance in the initial period, a credit card with a 0% APR can be one of your most affordable ways to borrow money. To qualify, you will typically need to have good credit or excellent credit.
Some cards have an initial period of 15 to 21 months during which you will not be charged interest.
Let’s say you get a credit card at 0% APR with a 15-month introductory term to cover unexpected expenses like car repairs or medical bills. You then pay the balance nine months later. That money will be borrowed at zero interest.
3. Buy now, pay later
” Buy Now, Pay Later” plans allow you to purchase items and then pay them off over a series of installments. Usually, there is no interest or fees. These payment plans are available online from many retailers, and sometimes in-store.
Afterpay can be used to buy now. Pay later company, which does not charge interest but may charge a late payment fee. Affirm could charge interest depending upon the amount of purchase and retailer.
Buy now and pay later options are available if you qualify for zero interest. This could make it affordable to borrow money for your essential expenses. It’s also easy to obtain. It can also lead to excessive spending.
4. 401(k), loan
You can borrow money from your retirement account to get a loan. You don’t have taxes or penalties to borrow money from yourself, unlike withdrawing money from your 401(k).
These loans also have some of the lowest rates. A 401(k), the loan interest is typically equal to the prime rate, which is the benchmark used by banks for setting rates on consumer loan products. This makes it cheaper than a credit card. The interest you pay goes to your retirement account.
A key benefit is that if you miss one payment, your credit score will not be affected since defaulted loans under 401(k), are not reported to credit agencies.
A 401(k), the loan is a disadvantage. Borrowing from your future self reduces your retirement nest egg, and it grows in a tax-advantaged bank.
5. Credit card for personal use
Some banks and credit unions offer personal lines of credit that act as a combination loan and credit card. Lenders will approve your application based on your credit score, income, and other debts. However, unlike a credit card, you can only draw what you need, and you pay interest only for the amount that you use.
This is a great option for those who don’t know how much they can borrow. The best rate rates are likely to be offered to borrowers with excellent credit.
The fastest way to borrow money
The riskier and more expensive it is, the easier it is to get the money. Here are the best options.
1. Online lender offers personal loan
Online lenders offer speed and convenience over traditional lenders such as banks and credit unions. They also allow for a fully online application and process for funding. Some banks require that you visit a branch to complete the application.
To find the lowest APR, it is important to pre-qualify lenders and compare them. This can depend on your income and credit score. Pre-qualification is done by online lenders. This allows you to shop around and not have to impact your credit.
Online lenders are able to offer loans to more people than banks. This includes those with fair or poor credit scores.
2. Loan apps
Cash advance apps can provide small advances on your pay, sometimes immediately, if your need is not urgent. However, you will have to pay an additional fee for expedited service. The average funding time is between one and three business days.
Many cash advance apps require a subscription fee and/or an optional tip. Earnin offers advances from $100 up to $500. However, it charges no interest but does ask for a tip of up to $14 per advance.
3. Cash advance using a credit card
Your credit card may allow you to access cash advances. It’s like using your credit card to buy cash, not goods or services.
Although cash advances can be limited to a few hundred dollars per month, they are easy and fast to obtain. To withdraw cash, you can simply go to an ATM if your credit card comes with a PIN. If your PIN is not available, bring your ID and your card to an ATM that allows you to withdraw funds through your card’s payment network.
Although it is a quick way to get your money, it can be costly. The costs of borrowing money will increase immediately due to the combination of ATM fees, bank fees, and cash advance fees.
Also read: 8 Funding Options To Raise Startup Capital For Your Business
4. Loan from family or friends
If you are in dire need of money, you might know someone who can help you. This will save you the time and hassle of applying for a loan from other lenders. This is a great option for anyone who needs money quickly or is concerned about their credit score.
Be careful when you approach your loved one for a loan. Conflict can arise when loans are made between family members and friends. Consequently, it is important to put the terms of mutual agreement on paper and have the document notarized.
5. Pawnshop loan
A Pawnshop Loan is similar to a secured bank loan. You will need to pledge an item as collateral. You can think of jewelry, antiques, electronics, or even firearms. The pawnshop will assess the item and make you an offer.
Accepting the amount will allow you to walk away with cash and a ticket. You can return your item after you have repaid the amount. The pawnshop will keep your item if you do not repay within the stipulated time frame, which is usually 30 days.
A pawnshop loan is fast and doesn’t require approval. The APR can reach up to 200% if pawnshops also charge storage fees, appraisals, and insurance.
Avoid borrowing
1. Payday loans
A payday loan can be a small, short-term loan that is meant to be repaid with your next paycheck. Payday lending can be extremely expensive and should not be used as a last resort. Although funds are available almost immediately, they can also be very costly. For a two-week loan, a loan can be as low as $15 per $100.
According to federal Consumer Financial Protection Bureau research, most borrowers end up paying more fees than they received in credit. This creates a cycle of debt.
2. High-interest installment loans
High-interest installment loans can be repaid in a matter of weeks or months. They have interest rates that exceed 36%, which is the highest rate most consumers consider to be affordable.
For example, a $1,000 loan would have a 6-month term at 60% APR and cost $182 in interest. The $197 monthly payment would be required. The same loan would have a 20% APR and cost $59 in interest. Avoid high-interest installment loans as they can be costly and difficult to repay.
Paying back borrowed money
After you have decided how to borrow the money, you should immediately create a plan to repay it. A financial setback should not turn into a long-term or ever-increasing amount of debt.
By carefully managing your finances and creating an emergency fund, you can reduce the likelihood of having to borrow.
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