The Best Ways to Borrow Money

It’s usually better to pay cash than to borrow money, but sometimes life throws a curveball, and you need to find other options.

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, carefully consider the different ways to borrow money and assess the benefits and risks of each option.

» MORE: Best personal loans

Borrowing almost always comes with a cost, but some types of lending are more affordable than others, especially if you have good or excellent credit (a score 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 (APRs), which represent the total cost of borrowing, for personal loans. Loan amounts range from a few hundred dollars to $50,000 or more.

Some banks provide an additional APR discount to existing customers. They might also offer perks like flexible payment options to help you manage loan repayment.

» MORE: Best bank loans

Many banks let you pre-qualify to preview the loan’s rate and term before you submit a formal application. If you don’t have good credit, however, it’s hard to get approved through a bank.

Credit unions may offer lower rates than banks, especially for those with bad credit (a score below 630). 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.

» MORE: Pros and cons of personal loans

2. 0% APR credit card

A 0% APR credit card can be one of the cheapest ways to borrow money if you pay off the balance within the card’s zero-interest introductory period — typically 15 to 21 months. You often need good or excellent credit to qualify.

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

You can purchase items now and pay for them over several weeks, usually without interest or fees, using a "buy now, pay later" plan. Many major retailers partner with BNPL companies to offer these payment plans at checkout.

Afterpay and Affirm are two buy now, pay later companies that don’t charge interest on their short-term payment plans, but Afterpay may charge a late payment fee.

If you get a zero-interest payment option, buy now, pay later could be a cheap way to borrow money for necessary expenses. But because it's easy to get, it can also lead to overspending.

» MORE: Compare buy now, pay later apps

4. 401(k) loan

A 401(k) loan allows you to borrow money from your retirement fund, and — unlike a 401(k) withdrawal — you don’t have to pay taxes and penalties on a loan as long as you stick to the repayment terms.

These loans offer some of the lowest rates available, and credit checks aren’t required. 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 or two percentage points. Also, the interest you pay goes back to your retirement account.

Another perk: 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. And if you leave your job before the funds are repaid, you may have to repay the remaining balance quickly to avoid penalties.

5. Personal line of credit

Personal lines of credit are offered by some banks and credit unions and behave like a hybrid between a loan and a credit card. Like a loan, a lender approves your application based on your credit profile, income and other debts. Like a credit card, you draw what you need and only pay interest 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 of getting the lowest rates.

6. Home equity financing

If you’re a homeowner, you may qualify for a home equity loan or home equity line of credit (HELOC), both of which allow you to borrow against your home’s value, minus what you owe on the mortgage. Your home serves as collateral, but you can expect lower interest rates than unsecured loans or credit lines. These options are best used to fund projects that increase the value of your home.

With a home equity loan, you get a lump-sum payment, which you’ll repay over a period up to 20 or 30 years.

With a HELOC, you’ll only withdraw and pay interest on the money you need, similar to a personal line of credit. You can access the funds during the “draw” period, which is typically 10 years. Then, you’ll repay the money over a term of up to 20 years.

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 new customers to visit a branch to complete the process.

» MORE: Best online loans

Pre-qualify and compare lenders to find the best APR, which can largely depend on factors like credit score and income. Pre-qualification only requires a soft credit check, so you can shop around without impacting your score.

Online lenders also cater to a wider variety of consumers. You are more likely to get a personal loan as a bad-credit borrower with an online lender than a bank.

» MORE: Requirements for a personal loan

2. Loan apps

If your need isn’t substantial, cash advance apps provide small advances on your paycheck, sometimes instantly — though you’ll likely pay an extra fee for expedited service. Typical no-fee funding times are between one and three days.

Most cash advance apps charge a subscription fee or ask for an optional tip. Earnin, which provides advances up to $100 per day and up to $750 per pay period, doesn't charge interest, but it requests a tip up to $13 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 can be capped at a few hundred to a few thousand dollars, but they’re quick and easy 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 a higher interest rate than what you pay to make purchases, and the costs start to accrue immediately.

4. Loan from family or friends

Though it can be difficult to ask, borrowing from someone you know could be a fast and affordable solution. You’ll avoid the sometimes lengthy formal application and approval processes required by other types of lenders. There’s also no credit check required with this type of loan.

However, approach a family loan with caution. Loans between friends and family can create conflict. To formalize things, put mutually agreed-upon terms, including interest and a repayment schedule, on paper and have that document notarized.

If you participate in a lending circle with family or friends, that can be a similar way to borrow money fast. With a lending circle, participating members pool their money together and loan a set amount out to each member on a rolling basis. Your lending circle might have a particular order to how it distributes payouts to participants, but that can change if you have an urgent need for the money.

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 or electronics. Once you bring the item in, the pawnshop assesses its value, condition and resale potential and makes you an offer.

If you accept the loan, you walk away with the cash and a pawn ticket. Upon repayment, you can collect your item. If you fail to repay by the deadline — 30 days on average — the pawnshop keeps it.

A pawnshop loan doesn’t have a loan approval process and can be a quick way to borrow money without requiring your credit score. 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%.

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 if possible, as high APRs can make it difficult to pay these loans off.

Once you’ve decided how you’re going to borrow the money, 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.