Almost everyone needs to borrow money at some point. Maybe it's for a new home. Maybe it's for college tuition. Maybe it's to start a business. Nowadays, professional financing options are many and varied.
Banks offer a variety of mortgage products, personal loans, construction loans, and other loan products depending upon their customers' needs. By definition, they take in money (deposits) and then distribute that money in the form of mortgages and consumer loans at a higher rate. They make their profit by capturing this spread. Banks are a traditional source of funds for those purchasing a house or car or those that are looking to refinance an existing loan at a more favorable rate. Many find that doing business with their own bank is easy. After all, they already have a relationship and an account there. In addition, personnel is usually on hand at the local branch to answer questions and help with paperwork.
A credit union is a cooperative institution controlled by its members—the people that use its services. Credit unions usually tend to include members of a particular group, organization or community to which one must belong in order to borrow.
Credit unions offer many of the same services as banks. But they are typically nonprofit enterprises, which helps enable them to lend money at more favorable rates or on more generous terms than commercial financial institutions. In addition, certain fees (such as transaction or lending application fees) may be cheaper.
Peer-to-peer (P2P) lending—also known as social lending or crowdlending—is a method of financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. While it removes the middleman from the process, it also involves more time, effort, and risk than using a brick-and-mortar lender. With peer-to-peer lending, borrowers receive financing from individual investors who are willing to lend their own money for an agreed interest rate. The two link up via a peer-to-peer online platform. Borrowers display their profiles on these sites, where investors can assess them to determine whether they would want to risk extending a loan to that person.
Along with comparable accounts, such as a 403(b) or 457 plan, 401(k) plans allow employees to invest money on a tax-deferred basis. Their primary purpose is to provide for an individual's retirement. But they can be a last resort for financing.
The money that you've contributed to the plan is technically yours, so there are no underwriting or application fees if you want to withdraw it. Or rather, borrow it—since a permanent withdrawal incurs taxes and a 10% penalty if you're under 59.5 years old.1
Most 401(k)s allow you to borrow up to 50% of the funds vested in the account, to a limit of $50,000, and for up to five years. Because the funds are not withdrawn, only borrowed, the loan is tax-free. You then repay the loan gradually, including both the principal and interest.
If used responsibly, credit cards are a great source of loans but can cause undue hardship to those who are not aware of the costs. They are not considered to be sources of longer-term financing. However, they can be a good source of funds for those who need money quickly and intend to repay the borrowed amount in short order. If an individual needs to borrow a small amount of money for a short period, a credit card (or a cash advance on a credit card) may not be a bad idea. After all, there are no application fees (assuming you already have a card). For those who pay off their entire balance at the end of every month, credit cards can be a source of loans at a 0% interest rate.