The 3 Best (and 3 Worst) Ways To Borrow Money, Ranked
The fact is, almost everyone will need to borrow money at some point. Home prices are up 44% from two years ago, and though prices are trending downward, buying a home right now is still very challenging for most Americans, forcing them to take out a loan. The question of whether or not we’re in a recession is on all economists’ lips, putting forth yet another reason why Americans might be in need of some extra cash that they don’t have on hand.
Borrowing money is not a bad thing to do, and there are ways to do it that will actually help your financial portfolio. Of course, there are also ways of borrowing that could catapult you into mounds of debt. Here’s a list of ways to borrow and how they rank in terms of risk and reward.
Best Borrowing Methods
There are a few different types of mortgages, but they’re all loans from a bank used to buy real estate. Because a bank is FDIC-insured, it’s a safe bet as far as lenders go. As a borrower, you apply for the type of mortgage you’d like, then agree to pay a principal amount as well as a rate of interest over time. The property you bought with the mortgage serves as collateral, so if you default on your payments, the bank gets ownership of your home.
This is an extremely common way to borrow money, as 42% of households in America are paying a mortgage on their home. Because getting a mortgage involves a bank, you’ll have access to assistance to help you through the process. The downside of working with a bank is that there are often extra fees associated with the application process, and your loan could get moved to another bank at any time.
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2. Personal Loans
Personal loans are also acquired from your bank and can be used for any purpose. What it costs you as the borrower depends on your credit score and the lender’s policies. There is no collateral collected for personal loans, but if you miss payments or default on the loan, your credit score is affected and could prevent you from receiving loans in the future. There are also interest and application fees associated with personal loans.
Like mortgages, personal loans are very common. More than 20 million Americans owe money on personal loans.
3. Borrowing From Your Retirement Plan
You might have heard that it’s not a good idea to withdraw money from your 401(k) or 403(b) account, but borrowing is a different story. A retirement plan loan means you borrow money from your retirement account and pay it back with interest over time. There are no tax penalties because you’re agreeing to pay back the money. Conversely, a withdrawal from a retirement plan means you have no plans to pay that money back, and therefore you’ll incur extra taxes and fees.
Worst Borrowing Methods
1. Payday Loans
When people need money quickly, they’ll sometimes opt for a payday loan. The problem with these is the interest on them is extremely high in comparison to other loans, and the principal amount is based on your income. Because of the high fees and interest associated with these loans, they’ve been labeled as predatory. They’ve actually been banned in 12 states. They can easily create more debt for the potential borrower.
2. Credit Card Cash Advance
If you have a credit card, you’ve probably noticed there’s an option to get a cash advance using the card. There is a transaction fee that depends on how much you’re looking to get in cash. This fee can be between 3%-5% of the amount. Plus, there’s accompanying interest to pay, which can be up to 25%. This ends up being an incredibly expensive way to borrow money.
3. Auto Title Loans
These loans use your car as collateral. When you take out the loan from an auto title loan company, you give them the deed to your vehicle. Additionally, you’ll pay a fee that can range up to 25% of what you’re taking out a loan for. If you don’t pay in time (which is usually around 30 days), the company might take your car away, depending on the terms of the loan. Many people who take out auto title loans end up taking out multiple loans so they can pay off the previous loan, creating a tremendous cycle of debt.
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