The best ways to borrow money

Look for low interest rates, limited fees and payment flexibility to score the best deal on a loan. By knowing where to look for good loans and what traps to avoid, you can find the best ways to borrow money.

Personal loans, lines of credit and credit cards are all viable options, but there are plenty out there to choose from. Compare your options to choose one that fits your budget and is able to fund you at the lowest rate you qualify for.

9 ways to borrow money

There are a variety of options available if you need to borrow money. Personal loans, credit cards and lines of credit are typically easier for anyone to qualify for. Other ways to borrow money, like a 401(k) loan or through a public agency, may require you to meet specific eligibility requirements.

Bank or credit union personal loan

Banks and credit unions are two types of financial institutions that offer personal loans. While banks are for-profit institutions, credit unions are not-for-profit institutions. This typically means that credit unions invest their profit back into benefits for members, like better rates and lower costs for services.

Both banks and credit unions typically cater to those with good credit scores — a FICO 670 or higher. Since credit unions are not-for-profit, they can usually offer the best rates, but if you aren’t already a member, you may need to pay a fee to become one.

Larger banks and federal credit unions often have online applications for personal loans. But local banks and credit unions may require you to apply in person at your local branch.

Pros

• Work with a team in person at your local branch.
• Application process is often straightforward and simple.

Cons

• Open checking or savings account may be required.
• Must have a high credit score to qualify.

Online personal loan

Online lenders don’t have physical branches, which makes them one of the quickest options when you need to borrow money. It typically only takes a few minutes to apply, and many have customer service representatives available via phone or chat to help answer any questions.

When you apply for a personal loan with an online lender, it’s easy to shop for different lenders quickly and find the best rates. There are typically more options for people with lower credit scores than with other types of lenders. Some even cater to credit scores as low as 560 — though you’ll really need to shop around to find the best bad credit loan rates.

Pros

• Quick and easy to apply.
• Options available for lower credit scores.

Cons

• No in-person customer service.
• Less room to negotiate rates and terms than a traditional lender.

0% APR credit card

Some credit cards, known as 0 percent APR credit cards, offer introductory periods with no interest accrual. The introductory period usually lasts anywhere from six to 21 months, which means you can spend within your credit limit without paying interest.

This sounds great, but it’s not the best way to borrow money for everyone. If you don’t have a plan to pay off your credit card within the introductory period, you may be faced with a hefty interest rate after the period ends. It’s a huge risk to borrow money this way if you don’t know how you will pay it off.

It is also difficult to qualify for a credit card with a 0 percent interest rate. There are other low-interest credit cards you may want to consider if you aren’t able to qualify for a zero percent APR card.

Pros

• Pay no interest during the introductory period.
• Flexible for spending as your needs change.

Cons

• Missing payments may mean you forfeit the introductory period.
• Difficult to qualify for most offers.
• Interest rates may be high outside the introductory period.

Peer-to-peer lending

Peer-to-peer (P2P) lending is a way to connect individual lenders with individual borrowers. P2P lending sites like Prosper facilitate loans and act as an alternative to a traditional bank loan. These types of lenders operate online, similar to online lenders, and the application process can typically be completed in just a few minutes.

P2P loans may have more options for borrowers, and some will approve loans to those with lower credit scores. While traditional banks require a credit score of at least 670, P2P lenders often have a minimum credit score well below that.

However, P2P loans are more expensive. They often have more fees than banks — or even online personal loans. In addition to a higher interest rate, expect origination fees and administrative fees that reduce the total amount you are able to borrow.

Pros

• More options for borrowers with lower credit scores.
• Quick online application — but sometimes slower funding speeds.

Cons

• No in-person customer service.
• Not legal in every state.
• Potential for high fees and slow turnaround.

Personal line of credit

A personal line of credit is often unsecured and works similar to a credit card. You can draw up to a predetermined maximum and pay back what you borrow with interest. As you repay, you are able to borrow again up to your credit limit. Unlike credit cards, lines of credit often have interest rates closer to those of a personal loan.

Banks and credit unions typically approve personal lines of credit for those who already have a checking account. Online lenders may offer them, but it is less common.

A personal line of credit isn’t a great long-term borrowing plan because you can only continue borrowing during the draw period, which typically lasts two years. After, your line of credit will enter a repayment period similar to a personal loan.

Pros

• Reuse the line of credit as you pay it back.
• Only pay interest on the amount that you borrow.

Cons

• Lenders may charge additional fees on top of interest.
• High credit score typically required.

Buy now, pay later

The buy now, pay later (BNPL) model allows you to finance your purchase and pay it back in set installments. Companies like Uplift and Affirm partner with thousands of retailers to offer you the option to buy something now and pay it back on your terms. You make a small down payment, usually 25 percent of the full price, and pay the rest back like a term loan or credit card.

Although some options have no interest, others charge interest on your purchase, so it’s important that you understand what you are getting into. Buy now, pay later works well for immediate, emergency purchases you can’t put off. But interest rates on longer repayment plans for purchases can be similar to or higher than other loan types, making them an expensive choice if you aren’t able to repay quickly.

BNPL products also aren’t without their problems. According to a Bankrate survey, 56 percent of users have experienced an issue when using a buy now, pay later service — including overspending and missing payments.

Pros

• Potentially no interest if you pay off your purchase in four installments.
• No late fees or other hidden fees.
• Doesn’t impact your credit score if you make your payments on time.

Cons

• Can only be used with retailers that partner with the companies.
• Some payment plans have interest rates as high as 15 percent.

401(k) loan

A 401(k) loan allows you to borrow from your retirement savings account. Unlike a 401(k) withdrawal, there is no penalty for taking a loan out from your account — and the interest you pay on the loan goes back into your retirement account.

Each retirement plan has slightly different rules for 401(k) loans, though they may allow you to borrow up to 50 percent of your savings. You typically have to pay back the loan within five years, and depending on your plan, you may only be able to take out a loan a certain number of times.

Pros

• The interest you pay goes back into your account.
• You don’t have to pay a withdrawal penalty.

Cons

• You miss out on potential growth during the loan term.
• If you leave your job, you may have to repay your loan more quickly.

Margin account

A margin account is a brokerage account where the broker-dealer lends cash to the investor using the account as collateral.

A margin account can also be used for a loan to cover noninvestment costs over a short period of time. Whatever way you use a margin account, you will also have to pay interest on the amount you borrow. Borrowing on margin can result in a gain if the securities invested increase in value, but it can also result in greater debt if they decrease in value.

For example, let’s say you invest $25 and the broker lends you $25 to invest a total of $50. If the price of the stock goes up from $50 to $60, you gain $10, meaning you now only owe $15. But if the price of the stock goes down to $40, you owe a total of $35.

Pros

• Rates are typically lower compared to other borrowing options.
• No additional fees to pay compared to other loan types.

Cons

• Interest rates may change.
• Potential for increased debt if the value of securities drops.

Public agencies

Public agencies, such as the government or nonprofits, typically have programs and loans to help out during financial emergencies. The exact programs available will depend on where you live. You can contact your local government or look to national government agencies to find loans based on your needs.

Borrowing from public agencies typically has much more specific requirements, but this type of loan also usually has better terms. Some loans may even have 0 percent interest rates. While applying for any public or nonprofit funding can be a lengthy process, it is often one of the best ways to avoid high fees and interest rates.

Pros

• Typically have low or no interest rates.
• May not check your credit history.

Cons

• May have specific income or residence requirements.
• Applications often require more information.

Bottom line

If you are looking for the cheapest option to borrow money, you should prequalify for a variety of these options and see which offers the best rates. Consider your reason for borrowing money and shop around with different lenders and different types of loans to compare what they have. It may be time consuming, but it can help you find the right option for your budget.

Frequently asked questions

• What are the worst ways to borrow money?

  • There are predatory lenders out there if you need quick funding. Any loan with high interest rates or numerous fees should be avoided. One of these worst ways to borrow money are payday loans, but any short-term option can be expensive and difficult to repay.
  • Not every lender is trustworthy. Research a lender’s ratings through the Consumer Financial Protection Bureau (CFPB) to see if it has a lot of credible complaints against it. Just because a lender looks credible doesn’t mean it is. You can avoid traps like high interest rates and hidden fees by researching lenders before you sign any agreements.

• How long does it take to get funded?

  Many lenders are able to fund a loan within one to two business days. Other options — like buy now, pay later — fund your purchase immediately.

• Do lenders require collateral?

  There are secured and unsecured options for nearly every way to borrow money. Depending on the lender and your finances, you may be required to provide collateral. However, credit cards, personal loans and lines of credit frequently have unsecured options available to their borrowers.

• Why is it important to be careful where you borrow money from?

  Not every lender is trustworthy. It’s important to do your research on any lender. Research their ratings through the Consumer Financial Protection Bureau (CFPB) to see if they have a lot of credible complaints against them. Just because a lender looks credible doesn’t mean they are. You can avoid traps like high interest rates and hidden fees by researching lenders before you sign any agreements.