Best ways to borrow money

Consumers may find many different ways to borrow money, with each type of borrowing having pros and cons. It’s good to understand how credit options work to make the best choice when you need to borrow money.

Credit cards

With a debit card, you’re withdrawing money from your own funds, but with a credit card you are effectively borrowing from the provider for a short period.

If you pay the money back in full by the due date, you generally will not pay interest. However, if you pay less than the full amount, you will pay interest on the continuing balance.

PROS: The grace period of the credit card — the time required for repayment — may be as much as 21 days. New credit card purchases up to your credit limit do not require new loan applications, so money is available instantly.

CONS: Late payments and missed payments may result in higher interest and fees. Unpaid balances continue to accrue interest charges. Cards may have annual fees.

SOURCES: Banks, other financial services, retail organizations, service organizations.

Credit card cash advance

This is like a credit card purchase, with three additional negatives: a transaction fee may be charged, interest charges usually begin from the instant the cash advance is provided and the interest rate is typically higher than for purchases.

Home equity loan and home equity line of credit (HELOC)

When you buy a house, you pay a down payment, and borrow the remainder of the home price with a mortgage. Repayment is amortized as equal monthly payments spread over the length of the loan, typically 10 to 30 years.

After you have built equity in your home, home equity loans (or second mortgages) and HELOCs let you use part of the value of your home as an asset to borrow back the money from your home equity to use for other expenses.

Learn More: How to build equity in your home in 10 steps

PROS: Other than paying cash in full, using a mortgage is probably the best way to become a homeowner or utilize your home’s equity for almost any purpose. Interest rates for loans secured by a home are typically lower than alternative borrowing options. These are among the few loans with potentially tax-deductible interest for certain home improvement circumstances (consult a tax advisor to learn more). Home equity lending can be used for many purposes, such as home improvement, debt consolidation and major expenses like weddings or education.

CONS: Because of the size and complexity of these loans, the approval process may take longer than other loans, possibly months. Your house is used as collateral for all these loans — so if you cannot make all payments on time, it may be at risk of foreclosure. These loans typically have longer terms than other loans options. Mortgage refinancing, home equity loans, and HELOCs may extend the length of repayment and actually increase the total interest paid over the length of the loan.

SOURCES: Banks, other financial services, FHA, VA.

Borrowing money with a personal loan

A personal loan is not secured by collateral, such as a home or a car, and may be used to consolidate debt or provide funds for a major expense or unexpected need. Approval is typically based on your credit score and expected repayment capabilities based on ongoing income.

PROS: Creates a fixed monthly payment, which may be helpful for budgeting. Rates can be lower than credit cards. Consolidation and reducing credit utilization across multiple cards  may improve financial stability.  Could be used for many purposes. Typically faster application timelines than mortgages.

CONS: Rates are generally higher than mortgages. Personal loan rates can go from single digits to above 20% or even 30% depending on your credit situation. Approval may be more difficult than credit card loans.

SOURCES: Banks, other financial services.

Car loans

Strictly for a new or used vehicle purchase.

PROS: Rates are generally lower than personal loans because the car is used as collateral. Dealers typically provide instant decisions during the car purchase transaction.

CONS: As the loan is secured, your car can be repossessed if you do not make all payments on time.

SOURCES: Banks, other financial services through car dealers.

Student loans

Strictly for education-related expenses, often with a term of 10 to 25 years.

PROS: Historically interest rates have been lower than credit cards and personal loans. Federal student loans may have lower rates than private providers. Some loans may have a six-month grace period after leaving college before the start of repayment.

CONS: Starting adult life with a big debt burden may be troublesome.

SOURCES: Banks, other financial institutions, federal government.

Payday advance

This is the generic name for a short-term, high-interest loan that nominally provides emergency funds from one payday to the next. In effect, you write a check for the borrowed amount plus a fee and the total is repaid or removed from your checking account after a short, fixed term. Extending the loan may incur an additional fee.

PROS: Generally no credit checks are needed. Access to cash is fairly quick. For unbanked individuals, this may be one of the few borrowing options available.

CONS: Payday loans typically have high interest rates, maybe even as much as a triple digit annual percentage rate (APR) especially if they are extended multiple times. 

SOURCES: Online and brick-and-mortar providers.

Retirement loan

This is a type of secured loan. You are borrowing from your personal funds in your retirement 401k or other instruments (but not Individual Retirement Accounts also known as IRAs).