Why borrowing money

Also, unlike a traditional loan, the interest doesn't go to the bank or another commercial lender—it goes to you. Since the interest is returned to your account, some argue, the cost of borrowing from your k fund is essentially a payment back to yourself for the use of the money. And, since the money that you've contributed to the plan is technically yours, there are no underwriting or application fees associated with the loan, either. Bear in mind, though, just because you're your own lender doesn't mean you can be sloppy or lazy with repayments.

If you don't pay on schedule, and the IRS finds out, you could be considered in default and your loan classified as a distribution with taxes and penalties due on it.

Another important, long-term consideration: If you remove money from your retirement plan, you lose out on the funds compounding with tax-free interest.

Also, most plans have a provision that prohibits you from making additional contributions until the loan balance is repaid. All of these things can have an adverse effect on your nest egg's growth. So, borrowing money from your k is usually seen as a last resort. Certainly, it's not a loan to be undertaken lightly. Anytime you use a credit card, you are in a sense borrowing money: The credit card company pays the merchant for you—advancing you the money, so to speak—and then you repay the card issuer when your card statement comes.

But a credit card can also be used not just to purchase a good or service, but for actual funds. It's called a cash advance.

If an individual needs to borrow a small amount of money for a short period, 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. Also, credit card companies will usually only lend or extend a relatively small amount of money or credit to the individual. That can be a disadvantage for those that need longer-term financing or for those that wish to make an exceptionally large purchase such as a new car.

Finally, borrowing too much money through credit cards could reduce your chances of getting loans or additional credit from other lending institutions. 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. Margin accounts allow a brokerage customer to borrow money to invest in securities. The funds or equity in the brokerage account are often used as collateral for this loan. The interest rates charged by margin accounts are usually better than or consistent with other sources of funding.

In addition, if a margin account is already maintained and the customer has an ample amount of equity in the account, a loan is somewhat easy to come by. Margin accounts are primarily used to make investments and are not a source of funding for longer-term financing.

That said, an individual with enough equity can use margin loans to purchase everything from a car to a home. However, should the value of the securities in the account decline, the brokerage firm may require the individual to put up additional collateral on short notice or risk the investments being sold out from under them. Finally, in a market downturn, those that have extended themselves on margin tend to experience more severe losses because of the interest charges that accrue as well as the possibility that they may have to meet a margin call.

The U. For example, Fannie Mae is a quasi-public agency that has worked to increase the availability and affordability of homeownership over the years. The government or the sponsored entity allows borrowers to repay borrowings over an extended period.

In addition, interest rates charged are usually favorable compared to private sources of funding. On the other hand, the paperwork to obtain a loan from a quasi-public agency can be daunting. Also, not everyone qualifies for government loans. There can be restrictive income and asset requirements. For example, with regard to certain Freddie Mac mortgage offerings, an individual's income must be equal to or less than the area's median income.

Financing companies, aka finance companies, are outfits dedicated to lending money. Unlike banks or credit unions, finance companies do not accept deposits or provide other financial services or products safe-deposit boxes, credit, cards, etc. They just routinely make loans to individuals or businesses needing funds. In the case of consumers, they usually provide loans to purchase big-ticket goods or services, such as a car, major appliances, or furniture. Some specialize in medical or healthcare costs.

While some lenders make longer-term loans, most financing companies specialize in short-term loans. Often they are connected to a manufacturer or larger company, serving as their financing arm, so to speak. Some of the best-known finance companies are associated with particular carmakers, like Toyota or General Motors, and make auto loans or auto leases. Financing companies usually offer competitive rates—though a lot depends on your credit score and financial history—and the overall fees can be low when compared to banks and other lending institutions.

In addition, the approval process is usually completed fairly quickly. Plus, there's the convenience factor, when the finance company is connected to the retailer or manufacturer whose products you're buying. If you want a personal loan, you should compare multiple lenders to find the lowest interest rate. Start with your current bank and then apply with online lenders, local credit unions and other banks. Most lenders will allow you to get prequalified, letting you see your potential interest rates and terms before you apply, all without a hard inquiry on your credit report.

Along with interest rates, you should also compare loan terms and fees. This will result in a hard inquiry on your credit report. For most lenders, this part of the process is quick; as long as you submit all relevant documents, you may be able to get your funds in a matter of days.

Remember that no matter the circumstance, the loan must be paid back eventually. When you take out a personal loan to pay off credit cards or to throw the perfect wedding, you are borrowing money that must be repaid with interest on top. Personal loans are a great way to consolidate debt and make major purchases, but you should always utilize this financial resource responsibly. How We Make Money. Brian Robson. Written by. Brian Robson covers topics relating to mortgages and first-time homebuyers as well as college students facing the difficult prospect of funding a higher education.

Edited By Aylea Wilkins. Edited by. Aylea Wilkins. Aylea Wilkins is an editor specializing in personal and home equity loans. She has previously worked for Bankrate editing content about auto, home and life insurance. She has been …. Share this page. Bankrate Logo Why you can trust Bankrate. Bankrate Logo Editorial Integrity. Key Principles We value your trust. Bankrate Logo Insurance Disclosure. Debt consolidation Alternative to a payday loan Home remodeling Moving costs Emergency expenses Appliance purchases Vehicle financing Wedding expenses Vacation costs Get pre-qualified Answer a few questions to see which personal loans you pre-qualify for.

The process is quick and easy, and it will not impact your credit score. Get Started. Get pre-qualified Answer a few questions to see which personal loans you pre-qualify for.

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Our free and flexible Couch to Financial Fitness plan will help you build confidence to manage your money. Step by step we can help you cut your spending, develop core saving muscles, and create better habits for the future.

Borrowing from a family member can provide emergency money and help you avoid borrowing at very high interest rates, such as using payday loans and doorstep lending also known as home credit. If you want to borrow from a partner, family member or friend, make sure you draw up a budget beforehand.

This will help you see how much money you have left for repayments after paying your current living expenses. Our specialists can help you start sorting out your financial problems. Find free, confidential advice now using our free Debt advice locator tool. Having a formal agreement in place can protect you. Find out about extra sources of income and support available to help you manage your household bills and save money in our guide What benefits you can claim and other ways to increase your income.

Find out more about loan sharks and how to spot them. To help assess your own finances. Use our Budget Planner. It will be less awkward to do this before you lend them money rather than having them to do it if they have problems repaying you after having borrowed the money. How you might deal with this type of situation is an entirely personal decision. Navigating this kind of situation can be hard, but with clear communication and expectation-setting, you can avoid a lot of the discomfort that comes with helping a friend out.

J Michael Collins, professor and director of the Center for Financial Security at the University of Wisconsin, US, says that money is already a taboo topic of conversation.

That taboo makes relationships complicated and murky. Lending money to someone also means the entire tenor of the relationship changes. And this subtly changes your role in the relationship. Klontz agrees.