Different Ways to Borrow Money – Pros and Cons of Each Method
All of us need to borrow money at various points in our lives, but it often carries a negative connotation due to the ease with which we make bad decisions. It can be a good thing, such as when it facilitates money creation. However, the trouble arises when we borrow money because we are desperate, or when we have not devised a solid repayment plan. By being informed of the different ways we can borrow money, you can make a decision on the process you are willing to consider. Here is a summary of the pros and cons of the most common money-borrowing avenues.
Pros and Cons of Borrowing Money
Family or Friends
The borrowing from friends and family is such an old tradition that the Bible speaks of it, and it has its very own set of proverbs. Borrowing in this manner is a great option for the short-term loan, but it puts an unfair burden on the lender long-term. Be careful with these loans. It’s not worth burning family bridges over them. Learn more about lending money to family members.
Secured Loans
Secured loans are the most common means of borrowing money. When we take a secured loan from the bank, we do so by backing it with security. A mortgage is a secured loan. The pros to secured loans are that they offer some of the lowest interest rates available. On the cons side, it can be a slow process to acquire one, and the bank has legal rights to the security. Learn more about getting the bank to lend you money.
Unsecured Loans
Unsecured loans are an excellent option for small, short-term loans from banks. The benefits are that they require no collateral, and you can access them very quickly. On the negative side of things, the interest rates are quite high, which make long-term unsecured loans impractical. Credit cards and Payday loans are considered forms of unsecured loans.
Credit Union Loans
Members of a credit union can often achieve secured and unsecured loans at better rates than a traditional bank will offer you. There are no cons other than those mentioned above regarding the specific type of loan. Learn more about why interest rates are lower at credit unions.
Margin Loans
Borrowers can achieve the best rates by borrowing from their own investments. One can even make short-term (60 days) loans against their IRA at zero interest. However, late payments or defaulting on the loan leads to stiff penalties because of the additional taxes and penalties.
Credit Cards or Overdraft
Credit cards and credit lines are excellent options for borrowing small amounts of money short-term. However, the interest rates are unfavorable, and quickly make long-term borrowing a poor decision.
It pays to consider your financial needs thoroughly, and then devise a repayment schedule. Armed with that knowledge, it’s much easier to pick the form of borrowing that works best for you.
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