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

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.

The big caveat when it comes to these types of loans is this: If you quit your job or get laid off, you’ll have to repay the loan in full, usually within 60 days. If you can’t, you’ll owe income taxes on the entire amount, as well as a 10 percent penalty.

For more on this option, see “Ask Stacy: Should I Borrow From My Retirement Account to Pay Debts?

5. Borrowing from family or friends

What Brent has already done — hitting up family and friends — can be one of the worst ways to borrow money. However, it can also be smart if the circumstances are right and proper precautions are taken.

For borrowers, this can be the safest kind of loan because you don’t have to worry about hidden fees or surging interest rates. On the other hand, you want to be confident that borrowing doesn’t put a strain on your relationship. To keep your relationship intact, make it as official as possible.

To make sure everyone’s on the same page, draft a legal document specifying rates, terms and due date. You can find the necessary forms cheap or free at any number of legal websites by searching for “promissory note.”

Like any other type of loan, this type requires on-time payments and a complete understanding between the parties. Nobody likes to see their friends or family spending on things like vacations or luxury items when they’re still owed money.

6. Peer-to-peer and other direct lenders

Also known as marketplace lending, peer-to-peer lending means bypassing banks and their tight purse strings by getting a loan through online platforms that either dole out money themselves or from multiple individual personal lenders. This might be a good way for Brent to find a lower-rate loan without jumping through banking hoops.

Borrowers can search for a lender on such sites as Lending Club or Prosper. The rate of interest you’ll pay will depend on your credit: If your credit score is very low, you may not be able to borrow this way at all. But if you have a good credit score and need a short- to medium-term loan, peer-to-peer can beat the banks.

MTN writer Maryalene LaPonsie in an earlier post described some of the big names in the industry today:

Prosper: Arguably the originator of for-profit peer-to-peer lending in the U.S., Prosper offers loans from $2,000 to $35,000. Rates vary widely based on your creditworthiness. The initial application asks for your address, income, credit score, loan amount and not much else.

Lending Club: Another of the early peer-to-peer lending sites, Lending Club also lends in amounts up to $35,000. Rates vary widely based on your creditworthiness. Its application process is remarkably similar to Prosper, with only basic information needed to get a rate quote.

Kabbage: [This lender] is specifically for small businesses and offers lines of credit of up to $100,000. Repayments are made on a six-month term, with fees ranging from 1 percent to 13.5 percent as of this writing.

Upstart: Targeting millennials who may not have the creditworthiness of more established borrowers, Upstart has a more involved application process. While still short, the application asks for information such as where you went to school, when you graduated and what you studied. “We built a model that … looks at your employability,” says Upstart CEO Dave Girouard. Loans from $1,000 to $50,000 are offered, with interest rates based on credit quality.

7. Credit unions

Credit unions typically offer flexible lending and lower rates than banks. As we explained in “9 Reasons to Love Credit Unions (and Not Big Banks),” credit unions typically pay higher interest on savings and charge less on loans. Many offer mortgage loans, and they’re a great source of car loans as well.

Credit unions might also offer signature loans, an unsecured loan guaranteed only by your signature. Obviously, you’ll need a membership and good credit, but this can be a good source of short-term cash.

What should Brent do?

It’s impossible to know the best option for Brent without additional information. We don’t know his cash flow, whether he has good credit, a 401(k) or securities he can borrow against. But one thing we do know: The better his credit, the more options he has. He may also be able to combine multiple sources to come up with the required money.

Bottom line? There’s no one-size-fits-all solution when it comes to borrowing money, and the less you borrow, the better. But if you’re going to borrow, at least these options could result in lower costs and a faster payback.

Got a question you’d like answered?

You can ask a question simply by hitting “reply” to our email newsletter. If you’re not subscribed, fix that right now by clicking here. The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. If you’ve got some time to kill, you can learn more about me here.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Stacy Johnson
Stacy Johnson @moneytalksnews
I'm the founder of Money Talks News and have spent the last 40+ years in the personal finance trenches. I'm a CPA, author of a few books and multiple Emmy recipient. I'm ... More

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