It is usually better to pay for emergency or unexpected expenses using your emergency fund instead of borrowing money from financial institutions. But sometimes, some instances are out of our control, and we need to look for outside help.
If you are in this type of situation, be aware that not all kinds of borrowing are designed equal, and some debentures have more financial disadvantages compared to others. Whether individuals want to get the best rate available in the market or just need the fund fast, they need to make sure to carefully consider other options and assess various risks associated with these options.
Cheapest ways to get funds through borrowing
Borrowing money always comes with a great cost. Still, some kinds of lending are more inexpensive compared to others, especially if individuals have excellent or good credits (a 690 or higher FICO rating). Listed below are some options people need to consider.
Personal debentures from financial institutions like credit unions, lending firms, or conventional banks
Financial institutions usually offer the lowest APR or Annual Percentage Rate, or the total cost of borrowing, for private debentures. Credit amounts range from a couple of hundred dollars to $10,000 or more. If the borrower is already a client with the traditional bank, they may receive additional Annual Percentage Rate discounts.
Some banks usually offer perks like flexible payment terms to help individuals manage emergency cases or uncertain financial times. If the individual does not have an excellent or good credit, it is pretty hard to get approval from banks. Also, some traditional banks let people pre-qualify to preview the debenture’s terms and rates.
This option is more popular with online lending firms. Credit unions can offer lower interest rates (IR) compared to conventional banks, especially for people with bad scores. Loan experts or officers may consider the borrower’s overall financial situation instead of relying heavily on their creditworthiness. But individuals will need to become a member before they can apply.
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Zero-percent Annual Percentage Rate credit card
Suppose the borrower can pay off the debenture balance within the credit card’s (CC) introductory period. In that case, a zero-percent Annual Percentage Rate CC can be one of the best and cheapest ways to borrow funds. People usually need excellent or good credit to qualify.
Some CCs offer an introductory period between fifteen and twenty-one months, during which the debenture will not accumulate interest on purchases. The borrower uses a zero-percent Annual Percentage Rate CC with a fifteen-month intro period to cover unexpected expenses like auto repairs or medical bills. If they pay off the remaining balance nine months later, they can borrow that money at zero percent interest.
Buy now, pay later schemes
This scheme lets people purchase items or avail services now and pay for them in installments, usually without fees or interest. A lot of vendors offer these plans during online checkout processes and in-store. They do not charge IRs, but may charge fees for late payments. If individuals can get a 0% interest payment option, this scheme could be a cheaper way to borrow for needed expenses. But since it is easy to get, it is also prone to overspending.
Retirement debentures allow people to borrow funds for themselves. And unlike 401K withdrawals, they do not have to pay penalties and taxes on this type of loan. These loans also offer some of the lowest rates in the market today. IRs on 401K debentures usually equal prime rates – the standard that traditional banks use to set IRs on consumer loan products – plus a 1% percentage point, making it a cheap option compared to an average CC.
Also, IRs paid goes back to the account holder’s retirement account. Another important benefit is if the account holder misses a payment, their score will not take a significant hit since defaulted 401K debentures are not reported to credit agencies. The disadvantage of this plan is that people will need to borrow from their future selves. It can lessen their retirement fund and its growth in tax-advantaged accounts.
Personal LOC (Line of Credit)
Personal LOCs behave like a hybrid between CCs and loans. Some financial institutions offer them. Like a standard loan, lending firms will need to approve the applications based on the person’s income, credit profile, and other debts. But like CCs, once approved, people draw only what they need and pay IR only on the money they use. It can be best for individuals who are not sure how much they need to borrow. Excellent or good credit individuals likely have the best chance of availing of low-interest rates.
Once people decide how they are going to borrow from the fund, they need to make plans to pay it back as soon as possible. Borrowers do not want financial setbacks transforming into ever-increasing or long-term debts.