Borrowing money these days without paying a king's ransom isn't easy. Interest rates are at 23-year highs. But with a little creativity, there are ways to get your hands on much-needed cash without breaking the bank.
The high cost of borrowing is due to the Federal Reserve raising interest rates 11 times from March 2022 through July 2023. When the Fed started its tightening campaign, money was free. Its key short-term borrowing rate was 0%. Today, it's in a range of 5.25% to 5.5%, the highest level since 2001.
Unfortunately, due to sticky inflation, the Fed isn't in a rush to lower rates. And the higher-for-longer rate mantra remains intact.
You'll Pay More To Borrow
Today's higher borrowing costs mean every time you go to borrow money or raise capital, you'll pay more than you did a few years ago. And that's the case whether you're taking out an auto loan, getting a mortgage or using a student loan to pay for tuition. You'll also likely face sticker shock if you're using a high-interest credit card to cover an unexpected expense, pay for a vacation or pay quarterly taxes to the IRS.
Some lenders offer a temporary lifeline. Offers such as a 0% cash advance or balance transfer, a mortgage paydown or quarter-point discount if you sign up for autopay on a loan fit the bill.
But since you likely have several types of financial accounts and, therefore, more options to borrow money or access cash, you can piece together a fair deal for yourself.
We're talking about saving a few bucks on interest when you need to get cash fast. The savings, of course, won't make borrowing as cheap as it was when the Fed was lending money for free. But savings are savings.
0% Credit Card Offers For Borrowing Money
Plastic gets a bad rap. That's mainly because the average credit card charges 24.66%, according to LendingTree.
But there's one credit card offer that's akin to an interest-free loan for six, 12 or even 18 months. Consider the 0% offer for cash advances and balance transfers. If you have good credit, this is an affordable source of cash. And it's quick and easy to access.
"If this option is available to you, a 0% credit card offer can offer an interest-free window ranging from several months to up to two years," said Melissa Lambarena, who studies credit cards at NerdWallet. "This can be helpful if you need to finance a large purchase or supplement your emergency fund."
Let's say your car's brakes give out and the dealer says it's going to cost $1,500 to replace them. If you don't have $1,500 sitting in your checkbook and your emergency fund is depleted because you tapped it to pay for a new roof, the 0% direct deposit cash in advance is a good option.
Borrowing Money With 0% Offers
Here's how these 0% offers, which might arrive via mail or email, work. You can typically access cash up to your available account borrowing limit with an interest-free payback period of six to 18 months. You'll typically pay an upfront fee of 3% or 4%, which is better than 24.66%. And it's this type of relative savings on interest that can save you big bucks.
To take advantage of this offer, you simply instruct the credit card company to deposit $1,500 into your checking account. Once it hits, you can use the money to pay for your car repair. You can also pay for the repair using another credit card (which may give you points back or other perks), and then transfer the balance over to your 0% card.
The big caveat: You must pay the balance off before the 0% introductory period ends, as your rate will reset to a much higher amount.
Shop For Good Rates
It's important to shop around for the best rates on big purchases, such as a home mortgage.
"Shopping around for a lower rate with a bunch of lenders can save you a ton of money," said Matt Schulz, chief credit analyst at LendingTree.
The high price of housing is a big challenge for aspiring homebuyers. Eight of 10 (78%) of hopeful homeowners say affordability challenges have blocked them from buying, according to a new Bankrate survey.
Find The Best Deal For Borrowing Money
Doing the legwork to get the best deal can net you savings. For example, the average rate for a 30-year fixed mortgage is now 7.34%, according to Bankrate. But the website has home loan offers as low as 6.68% — or 0.66% lower.
Saving two-thirds of a percentage point on a 30-year loan adds up. If you put down 20% and borrow $315,000 on the median existing home priced at $393,500, according to the National Association of Realtors, your monthly payment will be $140 less than had you settled for the average mortgage rate.
And when you're shopping for a lower rate or access to cash, don't limit yourself to the bank in town. You might get a better deal at a credit union or an online bank or other type of financial institution.
"The wider net you cast when you're shopping around, the better," said Schulz.
Weigh Your Options
You have a few options, all of which come with different rates. You can tap into the equity of your home with a home-equity loan (which will give you the lump sum of $50,000 at fixed rate) with a rate of 8.63%. A HELOC (which is akin to a revolving credit line but comes with a variable rate that moves up and down) will run you 9.07%. A personal loan will cost you 12.21%. And if you want to take a loan from your 401(k), you'll likely pay around 9.5%.
Let's assume you select the option with the lowest rate, or the home-equity line loan at 8.63%. Let's compare that with the average 12.21% personal loan. For simplicity, we'll assume it's a 30-year loan. Going the HELOC route will result in a monthly payment of $389 vs. $522 if you opt for the more costly personal loan. That's a savings of $133 per month, or $1,596 per year.
"The type of loan (you choose) really does matter," said Schulz. In the example above, since you're putting up your house as collateral (be aware of that risk), you're getting a better rate than you would on an unsecured personal loan, says Schulz.
If you're uncomfortable with using your home to back the loan, you can do this same exercise by comparing the pros and cons of taking a loan from your 401(k) at 9.5% and paying yourself back or going the personal loan route at roughly 12%. The point is to compare your borrowing options to come up with the most cost-effective way to meet your funding goal.
Inquire About Incentives When Borrowing Money
You've found your dream home. Now, you must figure out how to finance it.
With the average 30-year mortgage rate back above 7%, you might need to find a lower rate. One thing to consider, especially if it's a new construction property, is to ask the builder for a mortgage buy-down. These loans typically offer you a lower rate in years one and two of the 30-year loan and revert to market rate in year three.
But the savings could be substantial. With a two-year buy-down, your rate would fall from 7% to 5% in year one, and be discounted by a single point, or 6%, in year two.
"In this higher-rate environment, it does make sense to push a builder or a lender for any kind of incentives they may have," said Schulz.
Buy Now, Pay Later
Don't rule out "buy now, pay later," or BNPL. The emerging trend of buying what you need now and paying for it a few weeks down the road could be an inexpensive way to get what you need in a pinch.
BNPL lenders such as PayPal Pay in 4, Affirm, Afterpay and Klarna let you split up payments into bite-size chunks interest-free if you pay the money back in, say, four weeks or six weeks. And they don't require a credit check.
"It can be a good option if you want to avoid interest as it has an interest-free window," said Lambarena.
But remember, if you don't pay off the debt by the due date you will incur fees and interest charges. "So, if you're considering buy now, pay later, you should explore whether you can afford to pay it back over a span of several weeks," said Lambarena.
Consider Loaning Money To Yourself
Borrowing from your 401(k) shouldn't be taken lightly. But if you're in a pinch for money, don't want to apply for a new loan, and would rather pay yourself back any interest, a 401(k) loan could make sense. The pros are you're borrowing your own money. There's no credit check (which is good if you have a low credit score). And any interest you pay back you pay to yourself.
The interest you pay is the prime rate (now 8.5%) plus 1 or 2 percentage points. So, the rate is competitive with other loan options.
The downside, of course, is your 401(k) is a retirement savings tool. "It's money that is earmarked for your future and you could be putting your retirement at risk," said Lambarena. So, don't make the decision lightly. You can miss out on market gains while your money is out of the market. You also could run into problems if you leave your employer and must repay the balance quickly, adds Lambarena.
Land A Loan From Friends And Family
You might get a better deal if you borrow from friends and family. But if you go this route and want to avoid arguments and lose the respect of friends and family, do this: "Treat it like a business transaction," said Schulz.
Put the terms of the loan and the payback schedule in writing and have a frank discussion about payback expectations from the get-go, Schulz says.
The bottom line: When you're in a financial pinch, run the numbers to figure out what's the best place to access cash at the best price. "You should really do the math to determine whether you can truly afford to borrow and what your different options are," said Lambarena.
