If you need money to pay for something and don’t have the cash in your bank account, do you reach for your credit card?
Credit cards are so ubiquitous that many people simply default to using their credit cards to pay for things they can’t afford to pay for outright. However, a credit card is not always the best way to borrow money.
There are other options, including personal loans and home equity loans or lines of credit. Each of these options has pros and cons; let’s take a look at each one so you’ll be better able to choose the best borrowing option for your long-term financial security.
Borrowing money using credit cards
An estimated 77 percent of adults in the United States are credit card holders, and the average credit card debt per cardholder in the United States is $4,061, according to credit card and household debt data aggregated by Student Loan Hero for 2017.
Banks market credit cards aggressively, according to the Wall Street Journal, which has led to millions of new credit cards being issued each year and billions of dollars of accrued debt.
Unfortunately, credit cards can sometimes be an expensive way to borrow money. The average interest rate on credit cards varies by type of card. Below, you can see how interest rates vary depending on the type of card, according to data from Value Penguin.
There’s a variety of interest rates among credit cards. The table below, using data from Value Penguin, looks at the low and high ranges of interest rates for different kinds of cards.
|Card Type||Low Interest Rate||High Interest Rate||Overall Average Interest Rate|
|Travel Rewards Cards||15.62%||19.24%||15.99%|
|Business Credit Cards||13.12%||19.87%||15.37%|
|Cash Back Credit Cards||13.24%||22.99%||20.90%|
|Student Credit Cards||13.99%||22.62%||19.80%|
Because interest rates on credit cards are higher than interest rates for personal loans, using your credit card when you need to borrow money is one of your more costly options.
However, if you already have a credit card, using your credit card is both quick and simple. You won’t have to apply for a loan, wait for approval, and wait for the transfer of funds. You can simply charge what you need on a credit card, up to the card limit. The convenience-factor means credit cards may be the best way to borrow money short-term if you need the money immediately.
If you know you will likely carry a balance on your credit cards, prioritize choosing a low-interest card when you apply for a card to keep interest costs down. Make sure you never make a late payment; Experian explains falling behind by 60 days or more on your payments could trigger a penalty APR as high as 30.00%.
Credit card balance transfers help reduce interest
Another way to keep interest costs down if you’ve borrowed money on a credit card is to consider a balance transfer. A balance transfer involves transferring the balance of existing credit cards to a new credit card that offers a special low introductory rate, such as 0% APR for 18 months. While there is usually a balance transfer fee to move the old debt to the new card, there are balance transfer credit cards that don’t charge a fee at all.
However, it’s important to remember that the introductory rate lasts only for a limited time. Ideally, you should try to repay debt before the promotional rate expires, as the rate may go up substantially when the low-interest introductory rate ends.
Borrowing money using personal loans
Personal loans provide another option for borrowing that TransUnion reports is becoming increasingly popular. In the second quarter of 2017, for example, personal loan balances reportedly grew 10.8 percent to a record high of almost $107 billion in outstanding personal loan debt.
In many cases, personal loans are the best way to borrow money because of their relatively-low interest cost. Personal loans are available in our personal loan marketplace right now with interest rates as low as 5.25%, far below average credit card interest rates.
While interest rates for personal loans are lower than credit cards, there are some downsides to borrowing using a personal loan. Applying for a personal loan can take more time than just charging items you need on your credit card. In some cases, there are fees associated with obtaining a personal loan, such as an application fee and an origination fee.
However, if you shop around and compare lenders, you can keep these costs down or avoid them altogether. Shopping around for different personal loan lenders will also allow you to get the best interest rate possible, and avoid getting ripped off on interest, since rates vary from one loan issuer to another.
Credit scores affect personal loan rates
When you shop for personal loans, your credit score will affect the personal loan rates lenders offer you. Make sure you’ve checked your credit report for any errors before applying for a personal loan so you don’t get stuck with a higher rate because of inaccuracies on your credit report.
Mistakes that could affect your interest costs are very common. In fact, the Consumer Financial Protection Bureau handled 54,000 credit reporting complaints in 2016, with 74 percent of those complaints related to incorrect information on credit reports.
It takes time to correct mistakes, so if you’re planning to apply for a personal loan, check for errors on your credit report well before submitting your personal loan application. If you find mistakes, you can alert the credit card bureaus online at dispute pages for Equifax, Experian, and TransUnion.
If your credit score is low because you don’t have a long credit history or because you have a history of missed payments, the interest rate you pay will be much higher. And if your score is below 580, you may not be able to qualify for a personal loan. You would need to work on raising your credit by making on-time payments, or would need to get a cosigner to qualify for a personal loan.
The length of the term of your loan will also impact the total cost of interest that you pay. The longer the period you borrow money for, the more in interest you will pay. Choose the shortest repayment period you can without making your loan payments unaffordable, and find out if there is a prepayment penalty in case you want to repay the loan early.
Borrowing money using home equity loans or home equity lines of credit
If you are a homeowner, there may be other borrowing options available to you, including a home equity loan or a home equity line of credit (HELOC). To be eligible for either option, you must owe less on your home than it is worth because you are borrowing against the equity in your home.
Typically, lenders will require you to maintain a loan-to-value ratio (LTV) of less than 80 percent. That means the combined balance of your first mortgage plus your home equity loan or HELOC should equal no more than 80 percent of your home’s current appraised value.
For example, if your home is worth $100,000 and you still owe $75,000 on the mortgage, you would only be able to borrow an additional $5,000 against the equity. Otherwise, your combined loan balance would exceed $80,000 — 80 percent of what your home is worth. If you do want to exceed an 80 percent LTV, you will likely be required to pay private mortgage insurance (PMI).
If you have enough equity, you can borrow against your home’s value in two different ways.
- If you take out a home equity loan, you borrow a set amount of money that you receive in a lump sum and that you pay it back over a designated repayment period that usually lasts five to 15 years. You often borrow at a fixed rate, which means your monthly payment is the same for the duration of the loan.
- If you take out a home equity line of credit (HELOC), you’re approved to borrow up to a certain amount of money, which is your line of credit. You can borrow as much or as little as you want, up to the maximum permitted. You also have flexibility in repaying the loan once you have a balance. You’ll have the line of credit available to use as often as you’d like for a designated period, and will have to repay the entire outstanding balance in full at the end of the designated term. HELOC rates are typically variable, which means your interest rate fluctuates.
Both a home equity loan and a home equity line of credit have very low interest rates compared with credit cards and even compared with some personal loans.
To save on interest when borrowing money through a home equity loan or HELOC, it’s again important to shop around for different lenders. Pay attention to the interest rate, as well as to whether there are application costs and origination fees.
You should also carefully consider whether you’re willing to take the risk of borrowing against the value of your home. Both a personal loan and credit card debt are unsecured debt, which means there is no collateral — a specific asset — guaranteeing the loan. There is no asset the lender can take from you if you don’t pay your credit card bill or personal loan. If you put your house on the line, however, and you get into financial trouble, the lender could foreclose.
Determining the best way to borrow money
Ultimately, the best way to borrow money will depend upon your personal financial situation. To help you decide, consider the following summary of the pros and cons of each of these options:
- Credit cards: The biggest pro of borrowing money on a credit card is that you’ll get the money quickly if you already have a card open. Credit cards are also unsecured debt. High interest rates are a big disadvantage.
- Personal loans: The lower interest rate on personal loans compared to credit cards is a big advantage. Although interest rates aren’t typically as low as a home equity loan or HELOC, personal loans are unsecured debt, so you’re taking less risk. Cons include a potentially lengthy application process and delay in getting funds, along with the possibility of being charged fees.
- Home equity loans or HELOCs: Pros include very low interest rates. Cons include a longer application process and the risk that your home could be in jeopardy if you cannot make payments.
Whichever one of these options you choose as the best way to borrow money for you, just be sure to follow the tips we’ve provided for reducing interest costs so you won’t pay a fortune just for the privilege of borrowing money.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|