There isn’t a perfect solution for borrowing money.
One option is to borrow from family and friends, but experts often warn against it since these types of loans can strain relationships.
Or, you could borrow from your retirement savings. Amidst the job loss and financial troubles of the coronavirus outbreak, the US government’s $2 trillion stimulus package allows penalty-free withdrawals and loans from 401(k)s. Experts caution that this can be risky, however: If you get laid off or change jobs, repayment is due immediately, and borrowing from your retirement account could cause you to miss out on growth over the years.
Borrowing against your assets, like your investment portfolio or your home, or borrowing from a bank could be better alternatives. Bear in mind, though, that any method will cost you interest, and you’ll be responsible for paying back the loan in full.
If you’re short on cash, here are a few ways to get money you need, from the least to most expensive.
1. A home equity line of credit
Typical interest rate: 5.61% variable rate, according to ValuePenguin
Who can use one? Homeowners who have at least 20% equity in their homes
Home equity lines of credit, also known as HELOCs, are popular ways to borrow at interest rates much lower than most credit cards or personal loans can offer. This option is only available to homeowners with equity in their homes, so it might not be the right option for everyone.
HELOCs generally limit the amount you can borrow at 85% of your home’s equity, or 85% of the amount it’s worth minus what you owe on your mortgage. With this type of loan, you borrow what you need as you need it, since the line of credit stays open almost like a credit card.
However, it does mean that you’re putting your home up as collateral — you risk losing your home if it isn’t repaid. When used correctly, however, it can help you leverage the value you have built in your home at a low interest rate.
How to apply for one: Apply for a HELOC through any major bank that offers them. You’ll give information about your home, your mortgage, your income, and more. Then, you’ll need to have your home appraised. Finally, close on your loan and start drawing on your funds.
2. A home equity loan
Typical interest rate: 5.82% on average, according to ValuePenguin
Who can use one? Homeowners who have at least 20% equity in their homes
While a home equity line of credit and a home equity loan might sound similar, and even both be referred to as “second mortgages,” they’re rather different. A home equity loan also borrows against the equity in your home, but it operates more like a traditional loan than a HELOC does. The payment comes as a lump sum rather than on an as-needed basis, and will have a fixed interest rate, monthly payment, and repayment date.
Home equity loans are a great alternative to personal loans for homeowners — they function like a personal loan without the variable interest rate and revolving credit that come with a HELOC. Like a home equity line of credit, your house is used as the collateral, which puts it at stake if you don’t repay the loan. A home equity loan best for someone who knows how much they need to borrow, want a fixed monthly payment while repaying, and wants to only receive the funds once.
How to apply for one: Banks and lenders offer home equity loans, and the application is similar to that of a HELOC. You’ll need to have information about your home, mortgage, and income, and have an appraisal. Then, you’ll close on your home equity loan, and receive the funds you borrowed as a lump sum.
3. A credit card
Typical interest rate: 15.05%, according to data from the Federal Reserve
Who can use one? People with good or better credit, typically a minimum of 670 for a 0% APR credit card
Credit cards are a notoriously expensive way to borrow money. If you don’t pay off your balance every month, the high interest rate means borrowing that money gets expensive, fast. So if you’re considering putting your expenses on a credit card and know you can’t pay them off immediately, you might want a credit card with an introductory 0% APR.
These 0% APR cards give you a period of interest-free credit, generally between nine and 21 months, depending on the card. If you pay off your balance in full before the 0% interest rate expires, it could mean free borrowing. These cards are often referred to as balance transfer cards, because you can move your balance from another card (for a fee) to take advantage of the introductory rate. It’s a good option to cover small bills and purchases for anyone who’s confident they can pay back the funds quickly.
However, note that after the introductory period ends, the card will apply a regular (read: high) interest rate to the existing balance. If you aren’t going to pay off your balance in time, it might not be the best borrowing method for you.
How to apply for one: To get an introductory APR offer, you’ll need to open a new card. Check your credit score for free online, and then apply for a card that fits your credit score. After applying for your card, look for any fees, and look for a term that will fit your plans for repaying. Once you apply for and get your new card, make sure to note when the interest rate will increase and plan to pay off your balance before then.
4. A personal loan from a credit union
Typical interest rate: The average interest rate for an unsecured, 36-month loan at a credit union was 9.36% in December 2019
Who can use one? Any credit union member with a good or better credit score
Credit unions often charge less interest than banks on their loans, but they restrict loans to members. According to data from the National Credit Union Association and S&P Global, these member-owned, local institutions offer personal loans for an average of .8% cheaper than national banks in December 2019.
How to apply for one: If you’re already a member of a credit union, you can apply there. If not, joining one is generally pretty simple, but note that many have simple membership requirements, like living in a certain area. Apply on the credit union’s website or at a branch. While they can be cheaper than bank loans, that’s not always the case, so it’s smart to compare offers with online lenders and other banks to make sure it’s the best deal for you.
5. A personal loan from a bank
Typical interest rate: 6% to 30% or more. The average interest rate as of December 2019 was 10.18% APR.
Who can use one? Anyone with a good or better credit score.
Personal loans have high interest rates, but there’s no limit on what you can do with the money. According to Sipes, a personal loan is a last resort.
While it’s possible to find personal loan interest rates under 4%, like those offered by Lightstream, it’s only possible to get rates that low with the best credit scores. More frequently than not, interest rates start at 6%, and can go into the mid 30% range. Additionally, some lenders charge percentage-based administrative or origination fees.
Personal loans aren’t the most affordable way to borrow, but they are often unsecured loans, meaning that you won’t have to put up any collateral, like a home or car, for the loan. For someone without a home or a large investing portfolio, a personal loan might be the best bet.
How to apply for one: Search for a personal loan that fits your income, credit score, and needs. Pre-qualify with several different lenders online, and look for the lowest APR available to you. Next, gather information about your income, expenses, and more, and finish the application.
Bonus: A portfolio line of credit
Typical interest rate: 2.40% to 3.65%, according to Wealthfront
Who can use one? Investors with a significant portfolio and net worth. Minimum portfolio requirements vary by company.
Another way to borrow money is a portfolio line of credit, also called borrowing on margin. “Anyone who has after-tax money in an investment portfolio can utilize a portfolio line of credit,” says Monica Sipes, a financial planner with Exencial Wealth Advisors.
However, there’s a catch: You have to have a significant investment portfolio to take advantage. This type of loan works by allowing the bank to lend against your portfolio. Wealthfront requires that customer have a portfolio valued at over $25,000, for example. TD Ameritrade requires a net worth of $750,000 to be able to borrow, says financial planner Levi Sanchez. “I recommend them more so for a higher net worth client,” he says.
“The cool thing about those types of loans is that they’re generally interest only, so it gives the borrower a lot of power in terms of when to pay back,” adds Sipes. “They have very aggressive interest rates right now, meaning that they’re inexpensive.” Additionally, portfolio lines of credit are available rather quickly, as there’s far less paperwork involved with this than a loan or other lines of credit.
How to apply for one: Online banking service Wealthfront offers these portfolio lines of credit, and allows investors to borrow up to 30% of their taxable account balance. Interest rates are low: Wealthfront charges interest rates between 2.40% – 3.65%. They’re also available through other investing platforms and banks, like Bank of America and Morgan Stanley.
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