Ask Stacy: What’s the Best Way to Borrow?

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The best way to borrow used to be the only way to borrow: from a bank. These days, however, that may be the least attractive alternative.

There are a couple of situations when borrowing money is appropriate. One, when it’s profitable: You earn more with the borrowed money than you pay in interest. Two, when your back’s against the wall, and you simply don’t have a choice.

Here’s this week’s reader question:

My father loaned me $25,000 to buy a foreclosure home. I need to pay him back ASAP. What’s the best place to borrow from, and the best way to borrow? Thanks. — Brent

Before we get to Brent’s question, here’s a recent video that will help provide answers.

Now let’s discuss some specifics about the best ways to borrow.

The next time you’re thinking about borrowing money, consider one or a mix of these seven methods, none of which involves banks:

1. Zero percent credit cards

Credit cards with a zero percent interest rate are one way to borrow without paying interest, at least for a designated period of time. You can find examples in the credit card section of our Solutions Center. These cards offer “teaser rate” incentives with grace periods from six to 18 months.

These promotions are typically for purchases or balance transfers only, not cash advances, so they probably won’t work for Brent. In addition, after the card’s zero APR period expires, interest rates can be as high as 25 percent. So while zero is by definition the lowest rate you can get, these credit cards are short-term solutions.

2. Mortgages

What could be a good option for Brent is a mortgage, second mortgage or home equity line of credit. These allow you to borrow longer term, the interest is potentially deductible and, in the case of a first mortgage, may carry rates of less than 4 percent.

If Brent already has a mortgage on his foreclosure property, he could look into a second mortgage. As the name implies, a second mortgage resembles a first: You borrow a fixed amount, often at a fixed rate, and have a level monthly payment until it’s paid off.

A home equity line of credit acts more like a credit card. You’re approved for a certain amount and draw on it as needed. Like a credit card, the interest rate is generally variable, and your payment is based on the amount outstanding.

Second mortgages are generally the way to go when you have a large lump-sum expense, such as a major addition to your home, college tuition or, as in Brent’s case, you need a lump sum of cash.

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