Sometimes in life, you need more money than you have. It’s as simple as that. Credit cards can help fill small gaps between cash flow and income. Unfortunately, they come at a high price in terms of revolving interest. Loans offer lower interest rates and greater flexibility than credit cards will ever deliver. So, where do you go for a loan? Here, we explore multiple options available to consumers, like yourself, for obtaining loans. Some have more favorable terms than others. The better you understand your choices, the more informed you can be about which loan decision is best for you.
Banks and Credit Unions
For the average consumer, banks and credit unions offer excellent opportunities for funding most loans. Most provide personal loans to their customers, and some banks will offer perks to account holders, such as “no origination fees” for their loans. Credit unions may be an even better choice as many offer members lower interest rates and have short-term loan options with considerably lower interest rates than many payday loans. Some people feel that credit unions are more welcoming than larger banks when providing loans for smaller amounts.
Remember that being a credit union member or having an account with a bank does not immediately secure your funding with these institutions. You must also have acceptable credit for their lenders and often must provide collateral to secure the loan.
Online Lenders
The Internet has made the world a much smaller space. Nowhere is this more evident than when it comes to the ease of borrowing money online. Digital loan applications make it easy to apply for loans – many offer instant approval and rapid funding with money deposited directly into your account within one or two business days.
The downside of this, however, is that many people fall victim to scams and predatory lending practices by online lenders or scam artists with less than honorable intentions. Before you give your information to an online lender, make sure that you’ve checked out the lender’s reputation and reviews of other borrowers. More importantly, compare what these online lenders offer to traditional lenders to see how the offers shake out. If it appears too good to be true, it often is. At the same time, you don’t want to agree to terms unfavorable to you when better options are available.
Peer-to-Peer Lending
This type of lending is a relative newcomer to the scene when it comes to borrowing money. Peer-to-peer lending allows you to work directly with companies or individuals who wish to lend money as investment opportunities. Various lenders have different requirements, terms, and conditions. Make sure you read the small print before you agree to the terms and accept the funds. Many people are surprised by some of the fees associated with P2P loans, especially with the differences in hidden fees found in peer-to-peer loans compared to traditional bank and credit union loans. Another caution is that you can expect to pay slightly higher interest rates with peer-to-peer loans though the credit approval requirements may be more relaxed than with some traditional lenders.
Other Loan Options
The loan options above aren’t the only loan options available. Other options for borrowing money may be more or less appealing or advantageous for you to consider. This includes the following:
- Borrowing from your 401(k). This is a worthy option for those with a fair amount of money vested in 401(k) accounts. This option requires no credit check and allows you up to five years to repay the loan. Plus, the interest you pay on the loan goes back into the account to fund your retirement. Now, it locks you into your current job until the loan is repaid in full and hits you with unpleasant tax penalties if you cannot repay the loan. Finally, you’re not receiving returns on the money pulled from your 401(k) until it is returned.
- Credit card cash advances. This is the least favorable option. It’s often appealing because credit card companies make it easy to do. However, that ease comes at a high price you could find yourself paying for many years.
- Borrowing from family and friends. No one wants to “owe” friends and family, but sometimes this offers the best loan terms for interest rates and terms. However, the price can be high, in terms of awkwardness and ill will, if you cannot repay the loan. Also, you do not get to build your credit by repaying these loans.
As you can see, many options are available for borrowing money when emergencies arise. While some are more attractive than others, they all require some sacrifice, and the choice may not be as simple as you think.
How to Choose the Right Loan
Choosing the right loan is a matter of crunching numbers and taking a hard look at previous credit usage. It would be best to consider your current income, financial goals, and the financial reality of your spending lifestyle. If the need is an emergency, you may have fewer options. However, if you have time to improve your credit score before applying for a loan, you will have more favorable options at better interest rates.