Borrowing money is never really ideal, but there are definitely situations when a loan makes sense. After all, saving up the cash to buy a home could take decades, yet borrowing money could help you get a roof over your head — and begin building equity in a property — in short order. It can also make sense to borrow money to buy a car, start a business, or pay for a major home renovation.
The key to borrowing smartly is making sure you’re borrowing the right way — and with a plan. Ideally, you won’t borrow money for frivolous purchases, and you’ll only use a financial product that makes borrowing relatively inexpensive (or even free).
If you need to borrow money for any reason, here are some of the best options available today:
You can look into a personal loan with a credit union or a local bank, but you can also shop for personal loans online. You can even take out personal loans with peer-to-peer lenders like Lending Club or Prosper.
Either way, personal loans tend to be a good option for consumers with good or excellent credit, mostly because they can qualify for the lowest rates and best terms. In fact, it’s fairly common for those with the best credit to qualify for a personal loan with an interest rate in the 3% range in today’s low rate environment, although rates tend to go up from there. With LightStream, for example, you can take out a personal loan with a fixed APR as low as 2.49% if you sign up for autopay.
Generally speaking, personal loans can be advantageous since they come with fixed interest rates, fixed monthly payments, and a fixed repayment timeline. This means you’ll always know exactly what you owe, when your payment is due, and when your loan will finally be paid off.
The fact that personal loans give you a lump sum of cash upfront makes them ideal for situations where you need to borrow a fixed amount you know about ahead of time. For example, personal loans can be a good option if you want to borrow a set amount of money for a kitchen remodeling project, or if you have a set amount of high-interest credit card debt to pay off and consolidate.
0% APR Credit Cards
If you have some purchases you need to borrow for, you can also consider a credit card that offers 0% APR on all your charges for a limited time. Believe it or not, but plenty of cards offer zero interest on purchases for up to 18 months, after which you’ll pay the regular variable interest rate. Most 0% APR credit cards also come with no annual fee, and some even offer rewards based on your spending.
Because 0% APR credit cards offer a line of credit you can borrow against as you need it, they tend to be a good option for people who have purchases to make but aren’t sure of the total cost. A credit card lets you borrow only what you need, and getting access to 0% APR for a limited time can make this borrowing option free.
Just remember that 0% APR offers don’t last forever, and that the average credit card interest rate is currently over 16%. This means that 0% APR credit cards are only a good option for short-term borrowing. If you need to repay your loan amount over several years, you should consider other options.
Home Equity Products
If you have considerable equity in your home, then you can also look into getting a home equity line of credit (HELOC) or a home equity loan. HELOCs offer a line of credit you can borrow against similar to a credit card, and you’ll also get a variable interest rate. Home equity loans, on the other hand, have a fixed interest rate and fixed monthly payment similar to a personal loan.
Both types of home equity products let you use your home as collateral, which can help you secure a more affordable APR and better terms since your loan is “secured.” However, keep in mind that this means you’re putting your home on the line, and that you can lose your property to foreclosure if you don’t repay.
Lending Options to Avoid
The options above are some of the best to consider if you have to borrow money, but keep in mind that there are plenty of poor loan options out there as well. For example, you may have heard about 401(k) loans that let you borrow against your retirement savings plan. These loans actually take money from your retirement accounts, which can effectively decrease your account growth via investment gains. And even through you “pay yourself back” when you make 401(k) loan payments, there are limits to how much you can borrow, and you may be stuck having to repay your loan right away if you choose to switch jobs.
Another lending option to avoid includes payday loans, which can charge exorbitant interest rates of 400% or higher. And no matter what, you should steer clear of car title loans, credit card cash advances, and pawn shop loans.
Before You Borrow Money, Do This
Any time you think you may need to borrow money, you should take the time to consider any alternatives you have. It’s possible you may be able to save up the money for a project you want to complete, or you may be able to wait until you get a year-end bonus or your tax refund check. Only borrow money if you have to, or if you don’t believe waiting it out is an option.
At that point, you should take the time to figure out exactly how much you need to borrow. From there, compare all your borrowing options based on interest rates, loan fees, and loan repayment timelines. Also make sure to look over your monthly budget to see how much you can afford to pay each month without having to sacrifice other financial goals.
There’s nothing wrong with borrowing money when you have thought about the alternatives and the consequences ahead of time. Like with any other financial move, you should compare all your options and make sure any decision you make is an informed one.