What Are the Different Ways to Borrow Money?

Elle Jay

Most people need to borrow money at one time or another during their lifetimes. There are many different ways of borrowing money, and most of them involve some type of loan. Loans can come from banks, credit unions, family, or friends. One of the most important facts to remember about borrowed money is that it must be paid back.

Some checking accounts offer overdraft loans.
Some checking accounts offer overdraft loans.

Loans acquired from banks or credit unions include personal loans and business loans. Credit unions frequently offer lower interest rates than banks. Long-time customers may get preferential treatment when borrowing money, and good credit is important, regardless of the type of loan.

Some people choose to borrow money from family or friends.
Some people choose to borrow money from family or friends.

Borrowers use personal loans to consolidate bills, pay off high-interest debt, or purchase an expensive item. Small personal loans offer a short-term way to borrow money and usually require no collateral or guarantee. Larger loans include vehicle loans and mortgages, which have long-term repayment terms and require excellent credit or some form of security against the loan.

Business loans can be used to start a new business, purchase equipment, or pay for an expansion. Banks frequently ask for collateral with business loans, and repayment terms usually depend on the loan amount. Businesses can also borrow money through a line of credit. Frequently connected to a business or investment account, this type of loan offers flexibility because it does not require approval when the borrower needs money.

Paycheck loans provide fast funds without the hassles of borrowing money from banks and credit unions. Most payday loans only require identification and employment verification to borrow money. This type of loan takes just a few minutes, so the cash is in hand right away. Drawbacks of paycheck loans include high interest and short payback terms, which range from two weeks to one month. Borrowers typically pay the funds back with a post-dated check, usually provided upon receipt of the loan.

Perhaps the oldest way to borrow money involves borrowing from family or friends. Nearly everyone borrows a few bucks from his or her parents at one time or another, and larger loans are common between friends and family. This type of loan may offer little or no interest, depending on the agreement. Difficulties can occur when borrowing from friends and family if the loan is not viewed as a legitimate business deal. To avoid problems, all terms should be agreed upon before the loan begins.

Margin lending provides a way to borrow money using a stock portfolio or investment account as collateral. This type of loan offers low interest, and payments can frequently be taken directly from the borrower’s paycheck. Loan terms depend on the amount borrowed and the collateral’s value. Some borrowers use margin lending to purchase a vehicle or home whenever they can because of the extremely low interest.

Overdraft loans come with some checking accounts and offer short-term funds when an account becomes overdrawn. Interest for this type of borrowing is paid by a fee, which may be deducted for each use. Fees add up quickly, making this an expensive way to borrow money that is only appropriate for emergencies.

A credit card cash advance is another way of borrowing money that should only be used in an emergency. Credit cards charge higher interest rates for cash advances than for purchases. Other fees may also be attached to loans from a credit card. Since the interest on this type of loan is high, a short-term payment plan is recommended.

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