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Personal Finance

6 Things You Need to Know About Borrowing Money

Whether you need to borrow money instantly to cover an unexpected expense, or plan to apply for a mortgage, car loan or college loan, knowing the best options for your situation can save you time and money.

1.How to Borrow Money Fast

If you need cash to cover an unexpectedly large bill or emergency expense, here's how to borrow money in less than a day or two:

Friends and Family

Your friends and family may be eager to help, but be sure to ask the person if loaning you money will put their finances at risk. If they can afford to advance you the money, create a written agreement that spells out the terms of the deal. You can download free promissory note forms online.

Payroll Advance

Ask your employer if you can get paid ahead of schedule. Although this won't always be possible, it doesn't hurt to ask. It's been reported that Walmart is offering payroll advances.

A Short-Term Loan From an Online Lender

You may be able to get this type of personal loan, which is typically repaid within a year, approved within a day. Payday loans, which are a type of short-term loan, can often charge very high interest rates. Make sure you understand the terms associated with short-term personal loans before you go this route.

Borrowing from friends and family or getting a payroll advance will not affect your credit score. When you take out a short-term loan, in most instances it will not be reported to the credit bureaus. But if you default on a short-term personal loan it will be reported, and have a negative impact on your credit score.

Credit Card Advance

You can get instant cash from your credit card at an ATM. Your cash advance limit may be different than your credit limit, and the interest rate you will be charged is typically higher than what you pay on unpaid balances from regular purchases. Credit card cash advances also sometimes have additional fees, so costs can add up fast with this option.

2. How to Borrow Money You Expect to Pay Back Within a Few Years

Banks, credit unions, and online lenders offer personal loans that can be for as long as three-to-five years. Personal loans are typically "unsecured."

That means you do not have to offer any asset as collateral if you were to fall behind on payments. (A car loan is an example of a secured loan—the car is the collateral that the lender can take possession of if you fall behind on payments.) You can shop for personal loans here.

3. How to Borrow Money to Buy a Car or House

Before you apply for a car loan or a mortgage you should try to boost your credit score as high as possible.

Lenders will check your credit score when assessing car loan and mortgage applications. A high credit score can make it more likely that your application will be approved and can help you qualify for a lower interest rate. That can save you a lot of money in interest charges.

Lenders will also assess your ability to handle the new debt based on your income and your other existing debt. You can shop for auto loans here.

4. How to Borrow Money to Pay for College

There are two broad types of student loans to pay for college—federal loans and private loans.

Federal college loans are available to all students, and parents can also borrow money to pay for college through the federal PLUS loan program. Federal loans charge a fixed interest rate and offer a variety of different payback plans. Your credit score is not a factor in obtaining a federal college loan.

Private loans are offered by banks, credit unions, and online lenders. Private loans typically charge a variable interest rate and there are not the same flexible repayment options that are available with federal loans. Credit scores are part of the loan process. If your credit score is low, a private student loan lender may approve an application only if there is a co-signer.

5. How to Borrow From Your 401(K)

Borrowing from your 401(k) retirement account is something you might want to consider if you have no other options. But there are drawbacks to a 401(k) loan. During the time you are paying back the loan you likely won't be adding new contributions to your account.

And if you leave your job—voluntarily or not—the 401(k) loan must be repaid within a few months. Fail to do that and the loan will be treated as a withdrawal and you will be hit with a tax bill, and a 10% early-withdrawal penalty if you are under age 55.

6. How to Borrow From Your Home Equity Line of Credit or Home Equity Loan

If you own your home, and your mortgage balance is around 80% or less of your home's appraised value, you may be able to take out a loan that uses your equity in the home as collateral. A Home Equity Line of Credit (HELOC) works like a credit card—you have a credit line you can tap, typically for 10 years. Interest is charged only on unpaid balances. and the interest rate is typically variable.

A Home Equity Loan is for a fixed number of years—five to 10 years is common—and you receive the entire loan amount as a lump sum. The interest rate is typically fixed.

Borrowing against the value of your home requires careful consideration and deciding between a home equity loan or a line of credit is a big decision. Either way, choose carefully because you could lose your home in the event you fall behind on payments.


Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer, or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
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