Review Your Borrowing Options

It is helpful to know your credit options and what they mean. Before you borrow, learn about your options and how each one can affect your financial health.

Lower-expense options

Traditional bank and credit union loans. If you already have a bank or credit union account, begin with your own lender. Shop around for the best interest-rate options and bring any competitive rate quotes back to your bank. Rates are always changing, and they can vary significantly. What rate you get depends on your financial situation and your credit rating. If you have good credit, you may be able to negotiate a better interest rate.

Home equity loans. If you own a home, taking out a loan against it—a home equity loan— can be an inexpensive option. Check with banks, your current mortgage company, and other financial institutions to find a good interest rate and terms. Before you sign the paperwork, be sure you understand the financial commitment. Simply put, if you can’t make the payments, you risk losing your house because it’s the value of your house that’s securing the loan.

Medium expense options

Credit cards. Credit cards can be a convenient way to loan yourself money. If you plan to use a credit card look for the lowest interest rate you can find, no annual fee, and a grace period where interest isn’t charged as long as you pay by the due date. If you know you can’t trust yourself not to spend money you don’t have or don’t have a plan for paying off the purchase, it’s best to avoid using this credit option.

Loans from family and friends. When it comes to personal loans, every situation is unique. Some friends or family members may be able and willing to offer you a lower interest rate than you can get anywhere else. Be careful when receiving money from friends and family. Be aware there may be unspoken expectations when you receive money; for example, they may think they have the right to tell you how to spend it. They may say you can have the money for as long as you need, but then they run into financial trouble and need you to repay them right away. It’s best for both parties to treat the loan the same way as if it was a loan from a bank. Agree to terms up front — interest rate, payment amounts, due dates, payoff date — as well as consequences if you fail to repay the loan. Sign and date your mutual agreement.

Retirement loans. If you’ve been putting money into your employer’s retirement plan, usually a 401(k), you may be eligible to tap into that account. While the money you’ve been setting aside is technically yours, many withdrawal rules and potential penalties apply because it is a retirement fund and not a checking or savings account.

Specifically, if you can’t pay back the loan in full and on time, you may have to pay penalties and taxes on the amount borrowed. You also run the risk of damaging or draining your retirement savings.

Avoid this type of loan or have a plan in place to pay off your loan in the event you lose or leave your job before the loan is repaid. Otherwise, you must pay back the entire remaining balance within a short period of time, such as 60 days, or you’ll face penalties and taxes.
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