It costs money to borrow money, but it doesn’t necessarily cost much. When you get a loan, the key is to manage your interest rates and processing fees, and you can usually do this by getting the selective type of loan you use.
If you are faced with a high-interest rate debt (whether you have already obtained it or it seems like the only option available), look at the less expensive ways to get the money you need.
Reducing your borrowing costs means that your payments do more to reduce your debt burden.
Personal loans are traditional loans from a bank or credit union. These loans are typically cheaper than credit cards, loans and per diems. They come with a relatively low-interest rate, and that rate often stays fixed throughout the life of your loan – so you’re unlikely to get into “teasers” or be surprised by an increase in payments.
Processing fees should also be low or nonexistent (assuming you use a bank or credit union, as opposed to a payday store); everything you pay for is baked at an interest rate.
With a personal loan, you will borrow everything you need to pay off your other obligations in one lump sum. Then make regular monthly installments of payments until the loan is paid off (for example, every three or five years).
With each monthly payment, a portion of the payment leads to a reduction in the principal amount of the loan, with the remainder covering interest expenses (also called amortization).
What if you make some money? That’s perfect. You can usually repay the loan at any time without penalty.
To qualify for a personal loan, you need decent credit and sufficient income to repay the loan. But you don’t have to pledge collateral – you just have to promise to repay, which is why these are sometimes known as “signature” loans.
Loans from person to person
P2P loans are a variation on personal loans. Instead of borrowing from a bank or credit union, you can try to borrow from other individuals. These individuals may be friends and families, or they might be complete strangers willing to visit through P2P websites.
Sometimes P2P loans are easier to qualify for if you have less than perfect credit or irregular income (of course, it only makes sense to borrow if you are sure you will be able to repay).
Especially with friends and family, your finances may not matter, but it’s still a good idea to protect your “lender” and your relationships. Put everything into writing so there are no surprises and secure large loans (such as home loans) with a pledge in case something happens to you.
If you have good credit, you may be able to borrow at low teaser rates by reaping the benefits of a balancing offer. This may require opening a new credit card account, or you may receive a benefit check from your existing accounts that allow you to borrow at 0% APR for six months or so.
Balance transfers can work well when you know that the loan will be short-lived. However, it is difficult to predict the future and you may end up maintaining that loan beyond promotional times – and then that “free money” will turn into high-interest rate debt.
Using balance transfers offers confidentiality, and pay attention to fees that can erase all benefits.
If you have enough equity in your home, you can try to borrow your own home. Other mortgages often come with relatively low-interest rates (again, compared to credit cards and other consumer loans), but they are far from perfect.
The main problem with home equity loans is that you run the risk of losing your home: if you fail to make payments as agreed, your lender will potentially force you and sell your home.
In many cases, this is not a risk worth taking – it is better to use “unsecured” loans such as the loans mentioned above. What’s more, you will have to pay closing costs to get a home equity loan, and these costs can add up to thousands of dollars.
Deciding on the right loan for your needs is easy – getting approved is the hard part.
So what do you do if you can’t get credit?
Go smaller: You may be lucky in smaller institutions. Credit unions and local banks will continue to look at your credit and income but might be more flexible than megabanks.
Collateral: If you do not have enough income and funds to qualify for a loan, do you have any assets? You may be able to use these funds as collateral and obtain credit for the loan.
Work with traditional banks and credit unions, if possible, and use in-store financing only as a last resort. At a bank or credit union, you may be able to pledge savings accounts, CDs and other financial accounts as collateral.
Partners: A co-worker can also help you qualify. If you know someone with good credit and a decent income, lenders can use that person’s credit and income to approve a loan.
However, you are putting your signer at a difficult point – if you do not pay for whatever reason, the lender will expect your signer to repay everything you have borrowed, including fees and interest. It is important for your signer to understand the risk and understand how generous it is for someone to work with you.
To avoid debt in the future, strengthen your financial position
- Build credit so it is easier to borrow on attractive terms
- Keep an emergency fund so you can pay cash in time of need
- Plan your spending to save money and pay off debt every month