5 Different Ways to Borrow Money — and Pros and Cons of Each
LOS ANGELES, February 22, 2021 (Newswire.com) - People today have a wide array of borrowing options, depending on their needs. With so many ways to borrow money, it can be hard to weigh the pros and cons of each.
To make things easier, here are some of the most common different ways to borrow money and what type of person each one suits best.
1. Credit Card
A credit card is a physical card people can use to borrow money and pay later. It's a form of revolving debt, meaning you borrow and pay back at your convenience.
Many credit cards let users earn points and cashback on purchases, helping to save some cash. Consequently, they're excellent tools for everyday spending.
Every month, the borrower receives a statement containing all purchases for the billing period. The borrower must make at least the minimum payment indicated within about 30 days. If they carry a balance, they incur interest, which is added to the balance.
Some also offer signup bonuses (one-time cash bonuses for spending a certain amount in a specific time) and introductory 0% APR periods.
Credit cards are relatively easy to open. Even those with low credit often have access to entry-level credit cards.
Almost anyone can benefit from credit cards — as long as they're prudent with their spending. It's easy to fall deep into high-interest credit card debt without monitoring spending.
2. Personal Loan
A personal loan is a lump sum of cash a borrower can use for nearly anything. They usually come in amounts up to tens of thousands of dollars. Interest rates can be moderate unless the borrower has excellent credit.
Some common uses for personal loans include home renovations, vacations, and car repairs. However, one of their best uses is refinancing and consolidating debt.
Borrowers with high credit scores will benefit from personal loans the most, as interest rates will be low.
3. Credit Line
Credit lines are another form of revolving debt. They are harder to acquire than credit cards, accumulate interest immediately, and rarely offer rewards, but they come with lower interest rates and in higher amounts.
With that in mind, credit lines are more suitable for people with better credit scores that need to make larger, one-off purchases with a quick source of funds.
4. Home Equity Loan/HELOC
As a homeowner pays down their mortgage, they gain more equity in their home. This essentially means they own more of their home.
Home equity loans (sometimes called second mortgages) and home equity lines of credit (HELOCs) allow homeowners to borrow money using this equity as collateral.
Home equity loans let homeowners take out a fixed amount against their equity, while HELOCs allow for borrowing and paying off as needed.
Homeowners with significant equity are the best candidates for these borrowing methods. They're handy for homeowners looking to repair, renovate, or upgrade their home for two reasons:
- Repairs and renovations can increase home value
- Homeowners may be able to deduct home equity debt interest on their taxes to the extent the debt was used to substantially improve the home, subject to IRS limits
Overall, HELOCs are better if the homeowner prefers flexibility, whereas home equity loans suit homeowners who want predictable payments.
Notice: Information provided in this article is for informational purposes only. Consult your financial advisor about your financial circumstances.
Source: iQuanti, Inc.
Categories: Personal and Family Finances