The Best and Worst Methods to Borrow Cash

Borrowing some money isn’t a bad thing and it can help you navigate a rough financial patch. If you have been faced with a financial hardship you are not alone because it’s quite normal. At times, even a good emergency fund isn’t sufficient to help you deal with certain expenses. As such, further, we look into some of the appropriate and wrong ways of borrowing.

Mortgage loans

Mortgage loans tend to be cheaper compared to other options with high-interest rates. Nevertheless, it is important to ensure your loan increases your net worth since appreciation is likely to act in your favour.

When you own a home, you can tap into the home equity through mortgage refinancing or an equity line of credit. While each of these options has its pros and cons, you can qualify for low interest rates, but you need to have good credit scores which is great if you need to invest the money. The interest you pay on the mortgage loan is tax deductible, which means the cost of borrowing will be lower.

Personal loans

Unsecured loans don’t require collateral and this makes it a good option for individuals without equity. However, this implies that you are expected to pay higher interest than you would be charged for secured loans. Personal loans from are designed to be repaid within a few years and setting up automatic deductions make it easier to make the payments on time.

With the emergence of online lenders has made it easier to access the short-term loans and most Millennials like the convenience. The average interest rates for most personal loans stands at 11 percent, but you may qualify for lower interests if your credit score is very good.

0% credit cards

When you need a small amount of money and you have a good credit profile, you may want to consider a zero percent credit card. This card gives you an interest-free credit for a specified period. After the interest-free period is over, the rates are reset to the standard figure. This is a short-term loan with a zero cost of borrowing. Before taking this option, you need to be certain that you can clear the balance within the interest-free duration. Otherwise, you will pay the borrowed amount with high-interest rates.

Most of these cards are offered to people with great credit scores and if your application is not approved, you may end up lowering your scores further. As such, you should check your scores before applying.

Home Equity Lines of Credit (HELOCs)

Generally, HELOCs are lines of credit that are secured by the equity you have in your home. The lender feels safe since they can recover the money through your house. As such, this loan comes with a lower interest rate than unsecured lines of credit but it can be higher than what you get with mortgage loans. If your equity is about $200,000, it’s possible to get a line of credit with a limit slightly lower than your equity. Considering the high amount available as well as the favourable interest rates, this loan is ideal for people with a property but you can use it for other expenses apart from home renovation.

If you have a house with a good level of equity, HELOCs are a better alternative for your financial needs. However, they have some downsides similar to unsecured lines of credit. They come with variable interest rates and it is easy to accumulate massive debts if you use them to make purchases for an item that was never in your budget. As far as debt consolidation is concerned, HELOCs can be deadly since people who use them to consolidate credit card debt have a tendency of using the HELOCs like the previous credit card.

Payday loans

A payday loan should be at the bottom of your borrowing options. This is a short-term loan that comes with astronomical interest rates and it can get higher unless you clear the balance quickly. Nevertheless, you can’t get a high amount and to qualify for the maximum loan, you require high credit scores.

As the name implies, this loan is meant to be paid back on your next payday. As such, they are designed to help borrowers deal with short-term financial difficulties that can’t wait until your paycheck arrives. The APR can make the loan rise to several times the initial amount you borrowed. As such, irrespective of whether you repay the amount quickly or not, this option is costly. For instance, a $300 loan can cost you more than $50 over a period of two weeks. If you compare this to credit card interest which is about %7 for the same amount of principal, it’s clear the costs are astronomical.

Final words

At times, borrowing can help you when you are in a tight financial situation. However, it is important that you always look at the interest rates as well as any other terms that are recorded in the loan agreement. This way, you can navigate through dangerous borrowing pitfalls.

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