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If you’re looking for a loan, you might feel overwhelmed with the number of options available. There are a lot of different ways to borrow money and the right way depends on your personal situation. To help you make sense of loan options, here are seven ways you can borrow money:
- Personal loan
- Home equity loan or HELOC
- Friend or family loan
- Credit card or cash advance
- Retirement loan
- Pawnshop loan
- Payday loan
1. Personal loan
What it’s best for: Borrowing money online or from a bank or credit union to get funds quickly.
A personal loan is typically an unsecured loan that you can get from an online lender, a bank, or a credit union. Unsecured loans mean that there is no collateral backing up the loan, so lenders often see these types of loans as riskier and will charge a higher rate.
Approval for a personal loan is typically dependent on your credit score and income.
- You can have access to money quickly, often within a few days.
- Loans are usually unsecured, so you won’t lose your collateral if you can’t repay the loan.
- Fixed-rate loans are available, meaning monthly payments remain consistent.
- Rates can be high for borrowers with bad credit.
- Some lenders have minimum credit score requirements to qualify.
If a personal loan is what you need, you can use our guide to compare the best personal loans.
2. Home equity loan or HELOC
What it’s best for: Financial needs when you’ve built equity in your home.
Your home equity is the difference between what your home is worth and how much you owe on your mortgage or other debt related to the home. As you pay down your mortgage or your home value increases, the equity you have in your home increases.
When you build up enough equity, you may be able to qualify to use this equity to borrow money: either in the form of a home equity loan or a home equity line of credit (HELOC). With these loan products, you’re borrowing money against your equity, using it as collateral.
With a home equity loan, you’ll borrow a fixed amount and repay it over a set period of time. A HELOC works more like a credit card. You have access to a set line of credit, but you don’t have to borrow it all at once—you can draw the money as you need it. Your HELOC will be repaid over a fixed number of years, but might also include a large balloon payment at the end.
Generally, a home equity loan is better for someone who knows exactly how much they need to borrow and wants to borrow the money all at once. A HELOC is better for someone who isn’t sure how much they need to borrow and would like flexibility.
- Rates are generally lower than what you’ll find with other loan options.
- They may be easier to qualify for than unsecured loans, such as personal loans.
- As your equity functions as collateral, you risk losing your home if you can’t make the loan payments.
- You have to have equity built in your home in order to qualify.
3. Friend or family loan
What it’s best for: Situations where you don’t want to work with a lender.
Borrowing money from your friends or family can be tricky, but it could also come with a lot of benefits, including no credit check and low or no interest.
When borrowing money from someone you know, it’s a good idea to treat it like it’s an official loan from a lender. Write out the terms of the loan, any interest that you’ll pay, and a repayment schedule to which you can stick.
You may feel an additional personal burden to pay back the money and if you struggle to do so, your relationship may be damaged.
- Loans may come with low or no interest rates.
- There is no application process.
- There is no credit check.
- Loans can come with unclear repayment terms.
- You risk damaging relationships if money isn’t repaid.
For the other side of the equation, learn more about lending money to a friend or family member.
4. Credit card or cash advance
What it’s best for: Short-term debt.
If you need to pay for something but don’t have the cash available, you may be able to use a credit card. When you use a credit card to pay for a transaction, you are borrowing money from the credit card company and paying them back over an unspecified period of time.
A cash advance works similarly, though instead of paying for a purchase with your credit card, you’re withdrawing cash. Unlike purchases, though, a credit card cash advance comes with fees when you pull out money, in addition to monthly interest charges.
- If you already have a credit card, you can use it or get cash immediately—no need to apply to borrow money.
- Interest rates can be high—if you don’t pay the balance off monthly, the interest charges can add up and affect your credit.
If a credit card fits your needs, you can check out our guide to the best credit cards.
5. Retirement loan
What it’s best for: Borrowing money against employer-sponsored retirement plans.
If you have a retirement plan through an employer, like a 401(k), 403(b), or 457(b), your plan sponsor might offer the opportunity to take out a loan against part of your vested balance.
While borrowing from yourself may seem like an easy option, there are certain repayment penalties that should make this one of your last resorts for a loan.
- Your credit won’t be impacted—payments of this loan won’t show up on your credit report.
- You pay interest on the loan to yourself, making it a potentially low-cost way to access cash.
- There’s no credit check required and usually only a short application.
- If you don’t repay your loan within the required time frame (usually five years) it will be treated as an early distribution and you’ll pay a 10% penalty fee.
- If you leave your employer before the loan is repaid, you may have the pay the full outstanding balance right away.
Read more about whether taking a loan from your 401(k) to pay off credit card debt is worth it.
6. Pawnshop loan
What it’s best for: Borrowing when you can’t qualify for other loans.
If you’re having trouble qualifying for another loan, you may be considering a pawnshop loan. With a pawnshop loan, you bring an item of yours that’s valuable to the shop and leave it with them as collateral, and then you’ll be able to take a loan against the value of the item (usually 25% to 60%).
If you return to repay the loan and any associated interest and fees within a certain time period, you can have your item back. If you can’t, the pawnshop will sell your item to recoup their money, though you may be able to extend the loan.
- No credit check required as you’re securing the loan with collateral.
- It’s a fast way to access a loan, without a long application process.
- Interest rates can be more than 200%.
- If you can’t repay the loan and fees, you may not get your items back.
7. Payday loan
What it’s best for: Emergency situations with no other alternatives.
A payday loan is a small, short-term loan that is typically due at your next payday. If you’re unable to repay the loan, some lenders let you roll over the existing loan into a new one, while charging additional fees. This can lead borrowers into a cycle of debt and they may end up owing more in fees and interest than they originally borrowed.
- Fast access to cash, without needing to have good credit.
- Extremely high interest rate — as high as 400% APR.
- If you are unable to repay the loan, it can lead to a cycle of debt.
Learn more about how payday loans work.
Borrowing money for specific situations
Need to borrow money for a specific situation? Check out these resources:
What to keep in mind when borrowing money
An interest rate is what the lender charges you to borrow money. Understanding the interest rate a lender charges is important—higher interest rates will mean that you’re paying more for the money that you borrow.
A number of factors go into determining your interest rate, including your credit score, income, and whether the loan is secured or unsecured.
Loan repayment terms usually include the length of time you have to repay the loan and any other specific rules of repayment. Pay attention to the loan repayment terms and make sure you have a plan to pay back the money.
Some loans come with fees, in addition to the interest that you pay. These fees may include origination fees, application fees, prepayment fees, or late fees. Make sure you understand all of the fees so you get the true cost of the money that you’re borrowing.
How quickly do you need the money? Some loan options offer fast access to cash (within days) and others may take a little more time. So if you need the money quickly, fast loan funding might be high on your priority list.
Secured vs. unsecured loans
You’re probably not thinking about what will happen if you can’t repay your loan, but it’s an important consideration. If you have collateral securing your loan (like your home, with a home equity loan), you may lose it if you’re unable to keep up with the payments.
Anytime you’re borrowing money it’s a good idea to consider why you need it. Are you spending it on something that you really and truly need or can you live without it?
If it’s not a true need, consider holding off on the loan. Borrowing money can be expensive, and you may be better off saving up until you can afford to spend the money without taking a loan.
Author: Erica Gellerman