Despite my intentions to fully fund a high yield savings account for unexpected expenses, I’ve still been surprised by plumbers, medical expenses, and hail damage over the years. While I make sure that my emergency fund in my SmartyPig savings account is fully replenished, I think it’s still a good idea to keep in mind that there are ways to borrow money without it having to cost us an arm and a leg. But whatever you choose to do, learn as much as you can before getting that loan.
How To Borrow Money When Credit Is Tight
1. Peer to Peer Lending
Instead of driving to the bank to ask for a loan, you could try out a peer to peer lending site like Lending Club or Prosper. These sites connect borrowers and lenders in social lending networks.
If you’re a borrower with good credit, you could apply for an affordable loan through Lending Club. With Prosper, you could take out a three-year, amortized loan of up to $25,000. That’s enough to get a small business rolling, cover a huge car repair, or help with those pesky medical expenses. Another plus: there’s no penalty if you decide to prepay the loan.
On the downside, it may take a few weeks to be approved for your loan, so you wouldn’t want this option for an overnight emergency. Also, you need to check the fees out before applying, to see if you can afford them.
You can also check out our Lending Club review.
2. Credit Cards
The credit card industry has been roiled by many changes recently, but I remain a credit card holder. For one thing, I prefer the security of using credit cards when I’m making online purchases. Also, I appreciate these cards for the convenience they offer.
For each credit card purchase, I need to factor in the cost to use it. If it will cost me 15% interest to buy my video games, I should really try to pay off the charge before it starts accruing interest. Or maybe I can defer becoming a Guitar Hero player until the interest drops.
Now for those with good credit, you may be able to qualify for 0% balance transfer cards such as Discover credit cards or certain Citi cards. Here are a few popular credit cards with introductory 0% APR terms:
Credit Cards With Introductory 0% APR Terms
Be aware though, that credit card cash advances are quite expensive. Bank of America’s Platinum Plus Visa has a cash advance APR of over 24%. Even if you need cash that badly, you can probably find cheaper loans elsewhere.
3. People You Know: Family and Friends
Our family and friends constitute our first and oftentimes, most reliable social network. If you foresee the need to borrow money from family or friends, you should consider writing a formal promissory note to repay the debt by a certain date.
You should include the interest amount (if any) on your note. A program like Quicken Willmaker Plus (which you can get for free with the purchase of a Quicken product) can help you draft your own promissory note.
What are the consequences if I can’t keep up with my payments? To keep a personal relationship from going sour, you should keep communicating with your lenders. If you’re in trouble, your lenders may work with you to extend your repayment time, to reduce the amount you pay each month, or to come up with other creative payment solutions.
And in case you’re considering asking someone to cosign a loan for you, ask yourself what will happen if you can’t make the payments. Once upon a time, I cosigned a small loan for someone who dropped out of sight. Our lender tracked her down eventually, but I ended up paying quite a bit — it was something I couldn’t exactly afford at that time.
4. Line of Credit
Thankfully, banks and credit unions are still making loans. If you want to go the traditional route with a mortgage, vehicle loan, or other type of loan, you can shop around locally or check up on what’s available nationally on Bankrate.com.
If you’re a homeowner, you might be eligible for a home equity line of credit (HELOC). For instance, if you need the funds to give your roof a much-needed redo, you could apply for the amount you need. However, a failure to repay could cost you your home since HELOCs require collateral (e.g. your house) when they are granted. It’s important to understand the responsibilities as well as the liabilities of a line of credit.
5. Payday Loans or Personal Loans
There are certain loans that people decide to get — but they should only be considered as an absolute LAST resort. To get a payment problem worked out immediately, a payday or personal loan might work, but bear in mind that the costs of taking out such loans can be painfully high. These are recognized as the most expensive loans around, so make absolutely sure that you can pay them off quickly to minimize the charges you have to pay. Team Quick Cash and Cash Net USA are examples of payday loan sites that will immediately send you money once you sign up online. They promise to send you money the next day.
But please remember: quick cash is extremely expensive. Take a look at the fee schedule for these loans and they’ll reveal the high cost of taking such a loan — imagine having to pay 434% in interest! If you ever consider these types of loans, the best thing to do is pay them off as fast as you can.
Whatever method you choose when you borrow money, do make sure that you can afford the interest charges during the length of the loan.