Table of Contents

Banks
Credit Unions
Peer-to-Peer Lending (P2P)
401(k) Plans
Credit Cards
Margin Accounts
Public Agencies
Finance Companies
Tips for how to borrow Money
Frequently Answered Questions
How to Borrow FAQs
The Bottom Line

Personal Finance Credit

The Best Methods to Get a Loan Money

8 Ways to Make the money you need
By Glenn Curtis
Updated August 19, 2022
Review by Thomas Brock

Borrowing money can fund an upgrade to your home or even help pay for college tuition or help start an enterprise.

There are a variety of financing options between traditional institutions, like banks, credit unions, and financing companies in addition to lending through peer-to peer (P2P) or a loan from the 401(k) plan.
Important Takeaways

The money borrowed can be used to finance a new home or even to pay for college tuition, or even help to start a new business.
Traditional lenders include banks, credit unions and financing companies.
Peer-to-peer (P2P) loans are also referred to as crowd lending or social lending.
The borrower should be aware of the terms and the interest rate and fees of the loan.

Banks

Banks are a traditional source of money for those looking to borrow for to finance a home renovation or tuition at a college.

Banks have a variety of options to borrow money including mortgage products and personal loans and auto loans as well as construction loans in addition to offering opportunities to refinance an existing loan at a better rate.

Although banks might pay little interest on deposits they take in but they do charge a higher interest rate on the money they give out as loans. This spread is essentially how banks earn money.

Consumers often have a relationship with a bank and personnel are usually present at the branch of their choice to answer any questions or assist with paperwork.

However, banks typically have high costs associated with loan applications or servicing fees. Banks also have the option of reselling loans to other banks or financing companies and this may result in the need for fees, rates, and processes can change, often with little notice.
Borrowing From a Bank
Pros

Banks are well-known sources of consumer loans.

The majority of consumers have a relationship with a financial institution, making it easier to get loans.

Cons

Banks can resell your loan to another institution.

The fees can be expensive for loan applications and servicing.

Credit Unions

A credit union is a co-operative institution controlled by its members, the members who are part of an organization, group or community. Credit unions provide the same benefits as banks however, they may restrict the availability of services to only members.

They are usually non-profit organizations that allow them to lend money at lower rates or on more generous conditions than commercial banks, and certain fees or lending application charges may be less expensive or completely absent.

Membership in credit unions was at one time limited to people who shared an "common bond" and were employed by the same organization or members of a particular group, labor union, or other association.
Credit Unions Credit Union
Pros

Credit unions are not-for-profit institutions that charge less than a regular bank.

Interest rates and fees could also be more favorable.

Cons

Credit unions might offer smaller loan products than a larger institution may provide.

Credit unions may have membership requirements to be eligible.

Peer-to-Peer Lending (P2P)

Peer-to peer (P2P) lending, also known as social lending or crowdlending is a form of financing that enables individuals to borrow from and lend money directly to each other.

Through peer-to-peer lending, the individuals lend money to investors who will lend their own money for an agreed interest rate perhaps via a peer-to-peer online platform. Through these websites, investors are able to evaluate borrowers and decide whether or not they should lend an loan.

A borrower can receive the full amount or a fraction of the loan and could be funded by investors on the market for peer lending.

For lenders for lenders, the loans yield income in the form of interest. P2P loans represent an alternative source of finance, especially for those who aren't able to get an approval form traditional banks.
Peer-to-Peer Lending
Pros

Some borrowers may be able obtain the P2P loan even in the event that they are not eligible for other sources of credit.

The interest rate for loans may be lower than traditional loans.

Cons

P2P lending sites can have complicated fee structures that customers must be aware of.

Borrowers may end up owing money to multiple lenders rather than one creditor.

401(k) Plans

Most 401(k) plans and comparable retirement accounts for employees like a 403(b) and 457 plans, permit employees to take a 401(k) loan.

The majority of 401(k)s permit loans up to 50% of funds vested in the account up to the limit of $50,000 as well as for up to 5 years. Since the funds cannot be withdrawn, only borrowed, the loan is tax-free. The payments are made with principal and interest.1

Unlike a traditional loan, the interest doesn't go to the bank , or any other commercial lender. It is paid back to the person who borrowed the money. If the repayments aren't completed according to the requirements or are ended completely and completely, the IRS may find the borrower to be in default, and the loan could be classified as a distribution, with tax and penalties due on it. A permanent withdrawal from a 401(k) is subject to tax and a 10% penalty for those who are less than 59.5 years old.2
The Borrowing of the 401(k) Plan
Pros

No application or underwriting fee.

The interest is credited to the borrower's account, effectively giving them a loan to themselves.

Cons

There could be tax implications when borrowing against your 401(k)

This can also cut down on the amount of money you'll be left with when you retire.

Credit Cards

The use of credit cards is just like borrowing money. A credit card provider is paid by the merchant, essentially advancing a loan. When a credit card is used to withdraw cash. This is known as cash advance.

A cash advance from credit cards does not incur charges for application and for those who pay the entire balance by the end of every month, credit card can be a source of loans at a 0% interest rate.

However, if a balance is carried over, credit cards can carry exorbitant interest rate charges, often over 20% per year. In addition, credit card companies will typically only loan or grant a smaller amount of money or credit to the individual, so the purchase of large amounts cannot be funded in this manner.
The Borrowing of Credit Cards
Pros

There are no application costs.

No interest, as long as you can pay off your advances every month.

Cons

High interest rates are possible if a balance is allowed to increase.

May reduce your credit score of you make a large amount of loans.

Margin Accounts

Margin accounts allow customers of brokerage to borrow money to invest in securities. The funds or equity in the brokerage account are typically utilized as collateral for this loan.
Margin

The rates of interest charged by margin accounts are usually better than or consistent with other sources of funding. Furthermore when a margin account is already maintained and the account holder has an ample amount to invest in equity then a loan can be easily arranged.

Margin accounts are primarily used to make investments and they are not the best source of funds for financing for a longer period of time. A person with sufficient capital can make margin loans to purchase anything from cars to a brand new house, but should the values of the securities in the account decline the brokerage company could have to ask the person to provide additional collateral with a very short notice, or risk selling the investment.
The Borrowing of Margin Accounts
Pros

More favorable rates of interest over other sources

Cons

The borrower might need to provide additional collateral should the price declines.

The loss could be greater in the event of a recession.

Public Agencies

A U.S. government or entities chartered or sponsored by the government could provide funds. Fannie Mae is a quasi-public agency that has been working to increase the availability and affordability of homeownership over the years.3

The government or the sponsored entity allows borrowers to repay loans for a longer period of time. Additionally, the interest rates charged are usually advantageous compared to private sources of financing.

The process to get a loan from this kind of agency is often a daunting task and not all people qualify for government loans which typically have strict income levels and assets requirements.4
Lending Money to the Government
Pros

Lower interest rates than private lenders

Cons

The borrower could be required to meet certain income conditions.

Applications may also be more complex than a traditional loan application.

Finance Companies

Finance companies are private firms that are devoted in lending cash. They usually offer loans to purchase expensive goods or services, like a car, major appliances or furniture.

Many financing firms focus on shorter-term loans and are often associated with particular carmakers, like Toyota as well as General Motors, who provide auto loans or auto leases.

Companies that offer financing typically provide competitive rates based on the credit score of the borrower and financial history. The approval process is typically done quickly and usually completed at the time of purchase.

Finance companies are not controlled by the federal government they are licensed, supervised and monitored by the state where they operate.5
The Borrowing of a Finance Company
Pros

Rates of interest are generally competitive.

Charges could be lower than traditional lenders.

Cons

Lower level of customer service

Less regulated than banks and other lenders

Tips for how to borrow Money

Before you can borrow money, it's important to take note of these things:

Know the rate of interest that each lender charges because higher rates of interest mean that you pay more for the amount borrowed.
Know the loan repayment terms as well as the duration of time to pay back the loan, and any other specific rules of repayment.
Fees can be added in addition to interest rates. These could include origination charges, application fees, or late fees.
Find out if the loan is secured or unsecured. If collateral secures the loan like a house, it can be forfeited to the lender, or even be put in foreclosure if there is a default on payments.

Frequently asked questions
Which Borrowing Methods are the Best to Avoid?

An payday loan is a short-term loan that is designed to be repaid on your next paycheck. However, these loans are very expensive as they can cost up to $15 for every $100 borrowed, which is equivalent at an annual percentage rate (APR) of 391%. two week loan.

In high interest installment loans are repayable in the span of a few weeks or months and have interest rates that exceed 36%, which is the highest rate that most consumer advocates think is affordable.6
What Are Common Types of Borrowing?

Most loans are either secured, backed by assets, or are unsecured with no collateral.

Common types of loans include mortgage loans, personal loans, student loans and credit card advances, and loans for retail loans.
What are the benefits of Borrowing Money?

Borrowing money allows consumers to obtain large ticket items like cars or homes.

Borrowing can also be a means to establish credit history or increase a credit score. Being responsible with debt will allow you to borrow money later on.
What Is Considered a Good Credit Score?

Credit scores range from 300 to 850 and are a measure of the likelihood of a person to pay back a loan. A higher credit score means that the borrower has less risk to a lender and more likely to make timely payments. A credit score of 700 or higher is usually considered to be excellent, while an 800 or higher score is thought to be excellent.7
The Bottom Line

Banks, credit unions, and finance companies are all traditional institutions that provide loans. Credit cards, government agencies, and investment accounts can be used to borrow money as well. If you're contemplating a loan it is essential to understand the conditions that apply to the loan and the rate of interest and charges to borrow.
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