When you need to borrow money, some ways are better than others. At face value, many lenders can put on a good show. However, knowing where to look for good loans and what traps to avoid, you can find the best ways to borrow money.

Looking for low interest rates, few to no extra fees and flexibility in paying your loan back will help you score the best deal. Credit unions and peer-to-peer lenders can offer you superior rates, while online lenders allow you to compare multiple loan offers quickly and easily. Other options like loans from public agencies and borrowing from your 401(k) account can give the cheapest deal if you can work within the borrowing requirements.

No matter what you need the money for, try to negotiate a deal with a lender you already have a relationship with to find insider rates you might not get with other lenders.

Bank or credit union personal loan

Banks and credit unions are two types of financial institutions that offer personal loans. The main difference between the two is that banks are for-profit institutions and credit unions are not-for-profit institutions. This typically means that credit unions invest the profits 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 (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.

To apply for a personal loan you can sometimes apply online, but you may need to apply in-person at your local branch. Applying for a personal loan at a bank or a credit union is a great option if you have a good credit history and you want the simplest way to borrow money.

Pros:
  • Work with a team in-person at your local branch.
  • Application process is straightforward and simple.
Cons:
  • You have to talk to multiple financial institutions to find the best rate.
  • Must have a high credit score to qualify.

Online personal loan

Online lenders operate solely online and don’t have physical branches for customers to visit. You can apply for a loan on their website, and it typically only takes a few minutes to apply. They have customer service representatives available for you to talk through via phone or chat to help answer any questions.

When you apply for a personal loan using online lenders, it’s easy to shop for different lenders quickly and find the best rates. There are typically more options for consumers with lower credit scores than with other types of lenders. Some lenders cater to credit scores as low as 560.

Pros:
  • Quick and easy to apply.
  • Can research loan options from your computer.
  • 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% APR credit cards, offer introductory periods with 0% interest accrual. The 0 percent interest period usually lasts anywhere from 6-21 months. Within this period, you can spend within your credit limit on the card without paying any interest as long as you pay it back within the specified introductory period.

This sounds great, but it’s not the best idea for everyone. If you don’t have a plan to pay off your credit card within the introductory period, you may be slapped 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. And the standard APR on the credit card may be very high.

Pros:
  • Potential to save on interest if you make your monthly payments on time.
  • Allows you to improve your credit score.
Cons:
  • Missing payments may mean you forfeit the introductory period.
  • The introductory APR doesn’t last forever.
  • You must pay back what you borrow quickly to avoid the typical interest fees.

Margin account

A margin account is a brokerage account where the broker-dealer lends cash to the investor using the account as collateral. Any rise in the stock bought is a gain but any fall is a loss.

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.

A margin account can also be used for a loan to cover non-investment costs over a short period of time. Whatever way you use a margin account, you will also have to pay interest on whatever you borrow. Borrowing using a margin account 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.

Pros:
  • Pay back your debt in a variety of ways by either selling securities or paying back cash.
  • 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 increase debt if the value of securities drop.

Peer-to-peer lending

Peer-to-peer (P2P) lending is a way to connect individual lenders with individual borrowers. Through P2P lending sites, like LendingClub or Prosper, this type of lending is facilitated as an alternative to a traditional bank loan. These types of lenders operate all online, similar to online lenders, and the application process can typically be completed in just a few minutes on their website.

P2P loans typically have more options for borrowers and will grant loans to those with lower credit scores that a bank usually won’t grant. While traditional banks require a credit score of at least 670, P2P lenders often have a minimum credit score requirement of 600.

Pros:
Cons:
  • No in-person customer service.
  • Not all jurisdictions allow for P2P lending.

401(k) loan

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

Each retirement plan has slightly different rules for 401(k) loans. Plans may allow you to borrow up to 50 percent of your savings. And you’ll typically have to pay back the loan within 5 years. 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 for any money you borrow during the borrowing period.
  • If you leave your job, you may have to repay your loan quickly depending on how the plan works.

Personal line of credit

A personal line of credit (PLOC) is an unsecured line of credit that works similar to a credit card, but they have lower interest rates than a credit card. Banks and credit unions typically grant a personal line of credit to those who already have a checking account with them. When you have a PLOC, you have a credit limit, you must make monthly payments and you pay interest on the amount that you don’t pay.

A personal line of credit isn’t a great long-term borrowing plan, as you can only continue borrowing during the draw period, typically two years. After this, they enter a repayment period so they are best for when you are temporarily short on cash.

Pros:
  • You can continually reuse the line of credit as you pay it back.
  • Only pay interest on the amount that you borrow.
  • Doesn’t impact your credit score.
Cons:
  • Lenders may charge additional fees on top of interest.
  • High credit score typically requires to get a PLOC.

Buy now, pay later

If you’re looking to purchase something at the store, but you just don’t have the funds right now, Buy now, pay later could be what you need. 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 later.

Some options have no interest, but other options charge you interest, so it’s important that you understand what you are getting into. This option works well if you just need cash short-term, but interest rates on longer repayment plans for purchases can be similar to or higher than other loan types.

Pros:
  • 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%.

Public agencies

Public agencies, such as the government or non-profits, typically have all different kinds of loans to help out citizens. Loans could be in place to help with anything from homeownership and rent assistance to gardening and starting a business. You can contact your local government or look to national government agencies to find out which types of loans might be available to you 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% interest rates. If you have a specific need for money and you are willing to do the work of filling out the necessary paperwork, a government loan can be one of the most economic ways to borrow money.

Pros:
  • Typically have low or no interest rates.
  • May not check your credit history.
Cons:
  • May have specific income requirements.
  • Applications can require more details.

Bottom line

There are lots of ways to borrow money, and it’s important to consider your options. Consider your reason for borrowing money and shop around with different lenders and different types of loans to compare what they have to offer you.

Take time to understand the complete terms of any loan you are considering before you take it on. Be aware that loans can have hidden fees or unclear terms, and it’s your job to understand what you are signing up for.

Frequently asked questions