You should plan to borrow when you run into a good investment opportunity that you can earn more with borrowed money than you pay in interest. However, there are times when you really need the money for an emergency purpose. This happens to most, if not all of us without a saving account.
You may want to consider some of the following methods to borrow money:
Personal Loan at a Bank
Most banks are hesitant to lend money without collateral in order to secure the loan. The easiest one is usually the bank you have an account with.
If you have an excellent credit rating, the bank may provide you with a small loan. If they ask for collateral, you may use your vehicle, boat, or whatever you have available. In worst case, you may need a co-signer.
A loan borrowed from a bank includes principal and interest payment for duration of 12, 24, or 36 months. It is a good idea to shop around for a low interest payments. Borrowed money from a bank will also help you to build your credit rating as long as you pay your monthly bills on time.
Borrowing money from credit unions is easier than commercial banks. They are more flexible and their interest rates are usually lower than banks.
You can approach a credit union for an unsecured loan if you are a member with good credit rating. Whenever you need a car loan, home equity lines of credit, and so on, try credit unions first.
Home Equity Line of Credit
Home equity line of credit or a second mortgage allows you to borrow more money and for a longer period. That depends on how much equity you have available on your existing home.
The interest rates are usually lower than borrowing money from banks for a personal use. You can be approved for a certain amount and draw on it as needed. Your payment will be based on the amount borrowed, and the interest rate is generally variable.
Try to get a line of credit if you don’t need a huge sum of money. Make sure to shop around for the lowest rate and fees. Also pay attention and read the fine print.
401 (K) Loans
If you have a 401 (k) retirement plan, you might be able to borrow up to half of your account balance. Rates are usually low.
You should be careful of borrowing money from your retirement account. If you get laid off or decide to quit your job, you’ll have to repay it in full amount, usually within 60 days. If you cannot come up with amount owed, you have to pay penalty, and you will owe income taxes on the entire amount. Be sure to check out all the rules that apply before considering borrowing from your retirement account.
Credit cards with zero percent interest rates and no balance transfers are great short-term solutions. These cards offer grace periods from six to eighteen months and are typically for balance transfers, and not cash advances. Once the card’s zero APR periods expires, interest rates can be 25 percent or higher. You should try to pay off the entire balance before the grace period deadline.
Margin loans use stocks and bond as collateral. You can put up half the purchase price when you borrow up to half of your stocks value. Interest rates are usually low, but it varies by company and the size of the loan. A margin loan will be profitable if you earn more than you pay in interest.
There’s certain risk with margin loans if margined securities drop in value. If your stock fall by a certain amount, you’ll have to come up with more money; otherwise, your brokerage firm will liquidate enough shares to get it. You have to think carefully before using margin loans.
Borrowing from Friends or Family
Borrowing from friends or family can be the safest kind of loan. You don’t have to worry about hidden fees, variable interest rates, or damaging your credit rating.
You should use this type of borrowing only for emergencies, and not for taking vacations or purchasing luxury items. You should feel responsible and pay what you owe based on your agreement.
You may use other sources, such as borrowing from your life insurance if you have one before turning to friend and family. Another source is to borrow using co-signer if you can’t get approved through banks or credit unions.
By William Robinson – 2019
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