Borrowing money, whether you need extra funds or to pay off debt, can be an integral part of a sound financial plan. But it’s essential to be aware of the potential risks that come with borrowing money and how best to mitigate them.
Before taking out a loan or credit line, it’s wise to review your budget and estimate your monthly payments. Doing this will enable you to make an informed decision.
Taking out a loan
If you need to borrow money, there are a number of sources you can turn to. Banks, credit unions and finance companies are some of the most popular options for doing so.
Before applying for a loan, carefully assess your financial situation and the amount of money coming in. Doing this will enable you to decide if a loan is the best option for you.
Loans are debts taken out by individuals or businesses for specific purposes that must then be repaid with interest over an agreed-upon period of time.
Some loans may include additional fees that must be paid in addition to your interest rate. These charges can range from origination fees and application/prepayment fees.
When borrowing money from friends or family, it’s essential to maintain their trust by paying them back on time and in full. Failing to do so could damage your relationship with them and cause them to lose faith in you as a lender.
Using a credit card
When you need to borrow money, credit cards are your go-to solution. They’re convenient and safer than cash, plus they are accepted at more places than ever before.
Credit cards provide consumers with the freedom to make purchases, transfer balances or get cash advances on a line of credit with the promise that they will repay the loan at some future date. Although interest rates for credit cards vary between cards, they tend to be higher than other forms of borrowing.
Some cards offer an introductory rate on purchases that can be as low as zero percent for an initial period. Be sure to check the interest rates after the introductory period ends and pay in full before then if possible.
Cash advances on credit cards are similar to purchases, except that interest begins accruing immediately and there’s usually a transaction fee attached. This could be either an even flat fee per advance or a percentage of the loan amount.
Using a line of credit
A line of credit is an ideal solution if you need to borrow money but require flexibility. With it, you can access the funds when needed and pay them back over time with regular minimum payments.
The amount you can borrow from a line of credit varies depending on the lender, but is usually fixed. It may be based on either a percentage of your income or on assets such as savings or investments that you already own.
You may opt for a secured line of credit, which requires that you pledge an asset as security for the loan. If you fail to repay it, your lender has the right to seize that asset.
An unsecured line of credit, on the other hand, doesn’t need any collateral. However, you might pay higher interest rates. This type of loan could be ideal for people who need a large sum of money but lack a valuable asset that they can use as security.
Using a payday loan
When in need of money, payday loans can be an option. But be sure to consider other options before agreeing to one.
Payday loans differ from credit cards or lines of credit in that they are short-term and high-cost debts that must be repaid all at once on your next payday. Unfortunately, fees and interest can make it difficult to stay current with payments, leading to an accumulation of debt that may eventually spiral out of control.
Many states provide protection for borrowers from high-cost payday lending by setting small loan rate caps and other laws. Unfortunately, some lenders still charge APRs of 36% or higher.
When you take out a payday loan, either write a post-dated check for the full amount and any fees or allow the lender to electronically withdraw funds from your bank account. Usually, payment must be made by your next payday – usually two to four weeks later.