Different Ways to Borrow Money – Pros and Cons of Each Method

Filed under Credit, Lending Money

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.

Should I Lend Money to a Family Member?

Filed under Lending Money

Deciding whether or not to lend a family member can be a frustrating and difficult decision to make. On one hand, you are likely quite close to the person and feel for their situation. However, you might not be doing too well yourself, and hey – you work hard for your money. There really is no right or wrong decision, but the decision you make should be grounded in the facts so as to avoid any discomfort between you and your family member.

Family Member Lending Money Situations

Let’s look at a few different situations. You’ve owned your own business for thirty years and everything has been going great. Each year, more and more income finds you, and – truth be told – you’re sitting pretty when it comes to money. All of a sudden, your brother calls you and says he’s out of work and his house is about to be foreclosed on as a result. Are you obligated to help him out?

• Of course not, but it sounds like you have the means, so why not?

Or how about another situation? You’re a college graduate who is struggling to make it in the working world. It seems like no matter how much you try to find that perfect job it slips right out from under your fingers. You had lunch with your sister yesterday and she told you about how she could really use an extra few hundred dollars to get her through the month. It’s not detrimental, but it sure would help. You think about it overnight, and while you aren’t exactly poor, you find making rent each month to be easier said than done. Should you loan her the money?

• You can if you want to, but it sounds like you need it more than she does.

Deciding whether or not to loan a family member money is entirely situational. If you can afford to do so without suffering at all, it’s tough to explain to your family member why you don’t want to lend them money. However, if you are in a rough situation yourself, they will likely understand that you simply don’t have the extra money at the moment, but if the situation were different, you would gladly be there to help out. Lending money to a family member is a different situation from lending money to friends because of the proximity and stronger bonds but the thought process is similar.

No one should be obligated to loan money to a relative simply because of family blood relations. Everything must be taken into consideration. Your financial situation and their reason for the money loan is very important and cannot be ignored.Do not let the pressures of other family members convince you that it is a “requirement” to lend this money. Lending money to family members is already a shaky and awkward situation, do it right the first time.

Keep an open line of communication and make decisions based upon facts so ultimately you will be able to handle these situations easier when you are faced with them. You can always suggest and lead them to payday loans or lending institutions such as credit unions.