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It’s usually better to pay for unexpected expenses with your emergency fund than to borrow money. But sometimes life throws a curveball, and you need to look to outside resources.
If this happens, be aware that not all forms of borrowing are created equal, and some have more financial drawbacks than others. Whether you want to get the best rate possible or just need the money fast, make sure to carefully consider your options and assess the risks.
» MORE: Best personal loans
Cheapest ways to borrow money
Borrowing always comes with a cost, but some types of lending are more affordable than others, especially if you have good or excellent credit (a FICO of 690 or higher). Here are your best options:
1. Personal loan from a bank or credit union
Banks or credit unions typically offer the lowest annual percentage rates, or total cost of borrowing, for personal loans. Loan amounts range from a few hundred dollars to $50,000 or more.
If you’re already a customer with the bank, you may receive an additional APR discount. Some banks also offer perks like flexible payment options to help you manage uncertain financial times.
» MORE: Best bank loans
If you don’t have good credit, it’s hard to get approved through a bank. Also, few banks let you pre-qualify to preview the loan’s rate and term. This option is more common with online lenders.
Credit unions may offer lower rates than banks, especially for those with bad credit.
Loan officers may consider your overall financial picture, instead of relying heavily on your creditworthiness. But you’ll need to become a credit union member before applying.
2. 0% APR credit card
If you can pay off the balance within the card’s introductory period, a 0% APR credit card can be one of the cheapest ways to borrow money. You typically need good or excellent credit to qualify.
Some cards offer an introductory period between 15 and 21 months, during which no interest will be charged on your purchases.
Say you use a 0% APR credit card with a 15-month introductory period to cover an unexpected expense like a medical bill or car repair, and you pay off the balance nine months later. You’ll have borrowed that money at zero interest.
» MORE: Best 0% APR credit cards
3. Buy now, pay later
Buy now, pay later plans let you purchase items now and pay for them over a series of installments, usually without interest or fees. Many retailers offer these payment plans during the online checkout process and sometimes in-store.
If you can get a zero-interest payment option, buy now, pay later could be a cheap way to borrow for necessary expenses. But because it's easy to get, it can also lead to overspending.
4. 401(k) loan
Retirement loans allow you to borrow money from yourself. And unlike a withdrawal from your 401(k), you don’t have to pay taxes and penalties on a loan.
They also offer some of the lowest rates available. Interest on a 401(k) loan typically equals the prime rate — the benchmark that is used by banks to set rates on consumer loan products — plus one percentage point, making it a cheaper option than your average credit card. Also, interest paid goes back to your retirement account.
Another key perk is if you miss a payment, your credit score won’t take a hit since defaulted 401(k) loans are not reported to credit bureaus.
The downside of a 401(k) loan? You’re borrowing from your future self, which lessens your retirement nest egg and its growth in a tax-advantaged account.
5. Personal line of credit
Personal lines of credit behave like a hybrid between a loan and a credit card and are offered by some banks and credit unions. Like a loan, a lender will need to approve your application based on your credit profile, income and other debts. But like a credit card, once approved, you draw only what you need and pay interest only on the amount you use.
This can be ideal for borrowers who aren’t sure how much they need to borrow. Good or excellent credit borrowers likely have the best chance at getting the lowest rates.
Personal loan from a bank or credit union
0% APR credit card
Buy now, pay later
Personal line of credit
Fastest ways to borrow money
Typically, the easier you can get the money, the riskier or more costly it tends to be. That said, here are your best options:
1. Personal loan from an online lender
Compared to traditional lenders like banks or credit unions, online lenders boast convenience and speed given their fully online application and funding process. Some banks, in contrast, require a branch visit to complete the process.
However, you’ll want to pre-qualify and compare lenders to find the best APR, which can largely depend on factors like credit score and income. Online lenders do a soft credit check with pre-qualification, so you can shop around without impacting your credit.
Online lenders also cater to a larger variety of consumers compared to banks, including those with fair and bad credit scores.
» MORE: Best online loans
2. Loan apps
If your need isn’t substantial, cash advance apps provide small advances on your paycheck, sometimes instantly — though you may pay an extra fee for expedited service. More typical funding times are between one and three days.
Most cash advance apps charge a subscription fee or optional tip. Earnin, which gives advances from $100 to $500, doesn't charge interest, but it requests a tip up to $14 for each advance.
3. Cash advance from a credit card
You may also have access to cash advances through your credit card. Think of it as using your credit card to "buy" cash rather than goods or services.
Cash advances are usually capped at a few hundred dollars, but they’re easy and quick to get. If your credit card has a PIN, simply visit an ATM to withdraw. If you don’t have a PIN, take your card and ID to a bank that offers advances through your card's payment network, such as Mastercard or Visa.
Though it’s a fast way to get money in your hands, it’s costly. You will likely encounter a combination of cash advance fees, ATM or bank fees and interest rates that are higher than the rate charged on purchases, and the costs start to accrue immediately.
4. Loan from family or friends
You might have someone in your circle who can lend you money if you’re in a pinch. You’ll avoid the sometimes lengthy formal application and approval process required from other types of lenders. This situation can be ideal for anyone who may need money fast or is worried they can’t qualify for a loan with their current credit score.
However, approach a loan from your loved one with caution. Loans between friends and family can create conflict. Therefore, put mutually agreed-upon terms on paper and have that document notarized.
5. Pawnshop loan
Like a secured loan from a bank, a pawnshop loan requires you to put up an item as collateral. Think jewelry, antiques, electronics or even firearms. Once you bring the item in, the pawnshop assesses its value, condition and resale potential and makes you an offer.
If you accept the amount, you walk away with the cash and a pawn ticket. Upon repayment, you can re-collect your item. If you fail to repay by the deadline — usually 30 days — the pawnshop keeps it.
A pawnshop loan doesn’t have a loan approval process and can be a quick way to borrow money. However, in addition to the interest rate charged on the loan, pawnshops charge fees for storage, appraisal and insurance that can result in an APR as high as 200%.
Personal loan from an online lender
Cash advance from a credit card
Loan from family or friends
Borrowing options to avoid
1. Payday loans
A payday loan is a type of small, short-term loan that’s meant to be repaid with your next paycheck. While funds can be obtained almost instantly, payday lending is extraordinarily costly and should be a last resort. Loans can cost $15 for every $100 borrowed, which amounts to an APR of 391% for a two-week loan.
Research from the federal Consumer Financial Protection Bureau shows that most borrowers end up paying more in fees than they originally received in credit, creating a cycle of debt.
2. High-interest installment loans
High-interest installment loans are repaid over a few weeks to months and have interest rates above 36%, the maximum rate that most consumer advocates consider affordable.
For example, a $1,000 loan with a six-month term and a 60% APR would cost $182 in interest and require a $197 monthly payment. The same loan with a 20% APR would cost $59 in interest. It’s best to avoid high-interest installment loans, as high APRs can make it difficult to pay these loans off.
Paying back borrowed money
Once you’ve decided how you’re going to borrow the money, immediately make a plan to pay it back. You don’t want a financial setback transforming into long-term or ever-increasing debt.
Not sure where to start? NerdWallet recommends using the 50/30/20 rule to create a budget since it’s an easy-to-follow strategy that accounts for your basic living expenses, debt obligations and savings.
You can lessen your chances of needing to borrow by carefully monitoring your money and building a healthy emergency fund for the future.