The Best Ways to Borrow Money

Americans love debt.

So much, in fact, that nearly 8 of 10 Americans hold some form of it to help them pay for everything from housing to hamburgers, according to the Federal Reserve's 2023 Survey of Consumer Finances. That number may be even higher now since household debt reached a record high in Q3 2024.

Living with debt doesn't have to be a money drain, however. Some forms of borrowing can help you build wealth.

“The ultra-high-net worth clients I work with like debt for the flexibility and opportunity it gives them,” says Robert Dietz, National Director at Bernstein Private Wealth Management. “They don't like to sell assets, they borrow against them to create even more wealth and tax-efficient income.”

Loan types

Ultimately, how you treat debt will determine how debt treats you. Finding wealth in debt — managing and directing your debts wisely and nimbly instead of drowning in them — often boils down to knowing the best ways to borrow money.

Here's a breakdown of 10 popular loan types and alternatives to help you be a better borrower.

Personal loans

Best if you have good to excellent credit

Personal loans get their name because you can use them to cover certain personal expenses, such as medical bills, home repairs, or that trip to Cabo. In the past, you may have personally known the local banker or credit union officer considering your loan application. Today, your personal relationship is just as likely to be with a computer as more lenders move to machine-generated algorithms to make credit decisions.

Though less personal now, these loans are no less effective. Personal loans can provide a more straightforward alternative to forms of revolving debt such as credit cards, which typically charge higher APR.

“If you're carrying a credit card balance, it may take decades to pay off,” says Brian Walsh, Ph.D., CFP, and head of Advice & Planning for SoFi, a digital financial services provider with a large personal loan portfolio. “A personal loan has monthly installments and an end date.”

If you're not a homeowner, a personal loan is also more accessible than forms of secured debt such as home equity loans.

Your personal loan will provide you with an upfront, lump sum of funds at a fixed rate to pay off big-ticket items like a wedding, honeymoon, debt consolidation, or kitchen remodel. 

To get the best APR on a personal loan, prequalify with several lenders. This process typically involves a soft credit check, which lets you make apples-to-apples APR comparisons without dinging your credit.

Because most personal loans are unsecured loans - you don't have to put up your house or car as collateral — lenders will review your FICO score, credit history, monthly income, and debt-to-income ratio (DTI) to determine if you're a good risk to pay them back. If you don't qualify, or you believe the quoted APR would strain your monthly budget, move on. You have other financing options.

401(k) loans

Best for disciplined, retirement-minded savers

Before you can obtain a 401(k) loan, you must have a 401(k) account. Fortunately, many employers offer these tax-advantaged retirement plans.

Typically, 401(k) plans let you borrow up to 50% of your 401(k) funds or $50,000, whichever is less. If your vested balance is under $10,000, you can borrow up to $10,000, though plans aren't required to permit the exception. Typically, you have five years to repay the loan (as long as you stay with your employer). The good news — all the principal and even the interest you pay on the loan flow back to your account.

If you pull money from your 401(k) and don't pay it back, it's viewed as withdrawal, not a loan, and you'll incur a 10% penalty if you're younger than 59 ½. The IRS taxes withdrawals as ordinary income regardless of your age (unless you made Roth contributions to your 401(k)). There are exceptions to the tax rules for certain hardships.

Even if you pay yourself back in full, your self-funded loan is not without financial consequences. Whenever you pause or reduce your contributions, your retirement nest egg has less time to grow. So, make your borrowing decisions prudently.

Compare: 401(k) Loan vs. Personal Loan

Credit cards

Best if you pay off your balance monthly

Credit cards are a revolving form of credit issued by stores, banks, and financial institutions and accepted by most merchants as payment. If you repay the card-issuing institution by the end of the card's grace period, you incur no interest charges (usually the time between the end of the card's billing cycle and the due date).

If you fail to pay your complete balance by the due date, you'll be charged interest on the remaining balance on a daily basis until it's paid off. Many consumers use credit cards for not only convenience and safety, but also for cashback rewards, hotel points, and airline miles.

“It's the only kind of debt that gives you cash back,” says Scott Adamo, head of franchise lending and sales for U.S. credit cards and unsecured lending at TD Bank. Adamo also noted that 83% of Americans hold at least one rewards card, according to a recent TD report, underscoring America's continuing, cozy and comfortable relationship with credit cards.

You can also use your credit card to obtain a cash advance, a form of short-term loan approved up to your card's credit limit.

Compare: Personal Loan vs. Credit Card

Cash advances can take a big bite out of your budget

If you had to pay your boxer Bruno's emergency surgery with a cash advance, assuming a 30% APR over three months, a 5% transaction fee, and $5 ATM processing fee, here's how it would break down:

Cash advances are expensive, but they can provide peace of mind. If you get too many Bruno-type bills, consider transferring them to a 0% balance transfer card.

Most cards charge between 3% and 5% of the transferred balance. Some have a 0% introductory period that lasts up to 21 months.

Home equity loans or lines of credit (HELOC)

Best if you want to put your home equity to work

Homeowner equity rocketed to record levels in 2024, according to the latest data from the Federal Reserve Bank of St. Louis (FRED). 

Home equity is the difference between the value of your home and what's left on the mortgage; you can tap that home wealth in the form of home equity loans and home equity lines of credit to pay for home improvements, bucket-list vacations, and a wide range of other expenses.

Both have proven popular with many homeowners, especially those unwilling to part with their low-rate, first-lien mortgages, in the sub-3% range.

With a home equity loan, you get your money as a lump sum, usually at a fixed rate, which you'll repay in monthly installments up to 20 or 30 years.

On the other hand, a home equity line of credit is often a variable-rate loan that features distinct withdrawal and repayment periods. During the withdrawal phase, you can make unlimited withdrawals on which you pay only the interest. Like a credit card, you can draw from the credit line up to your limit.

After the withdrawal period, generally up to 10 years, full repayment begins, during which you must repay both principal and interest over the loan's remaining term (often up to 20 years).

Compare:

• Personal Loan vs. Home Equity Loan
• HELOC vs. Personal Loan

Personal line of credit

Best if you want a credit-card like product with a lower interest rate

Unlike a personal loan, which provides a lump sum of funds at a fixed rate, a personal line of credit offers you access to a credit line that you can tap anytime, up to your limit. It's a revolving form of credit like a HELOC and credit card. The interest rate is typically variable and may be higher than a personal loan's APR.

Still, a personal line of credit is often less expensive than using a credit card, although you can use it like one. Without putting up any collateral, you get instant access to funds to help you pay for unexpected expenses or temporarily fill gaps in your cash flow. However, unlike credit cards, interest starts accruing immediately, with no grace period.

If approved for a line of credit, the lender may provide you with convenience checks or a card that you can tap as needed.

'Buy now, pay later'

Best if you can pay off new purchases within six weeks

A generation ago, if you wanted to buy something but didn't have the money, you asked the merchant to put it on layaway until you could pay for it. Today, you can walk home with the product the same day, courtesy of your favorite buy now, pay later (BNPL) lender.

This type of lender pays the merchant for the goods or services you've purchased, and you pay them back. Meanwhile, merchants pay BNPL lenders fees of 3% to 6% of the transaction amount.

Interest-free BNPL financing typically breaks the cost of your purchase into four equal payments over six weeks, with the first payment due at purchase. If you pay on time, financing is interest free.

Since their introduction, many BNPL lending platforms now offer pay-over-time plans that extend from 3 to 60 months. Interest on these plans can run from 0% to 36%, much like personal loans.

Also like personal loans, it's simple, not compound interest. “That little but important difference can add up to big savings,” says Andrea Hackett, an Affirm spokesperson.

Peer-to-peer lending

Peer-to-peer lenders may be viewed as a 21st century update on ancient lending circles, when family members or friends pooled their resources to assist one member of their group, a lending practice that still exists in pockets around the world.

On the funding side, they are often investors seeking a better return on their cash savings than they could earn with a bank account or money market fund, while applicants may be underserved by traditional lenders. Prosper is one of the few remaining true P2P marketplaces today.

If speed and responsiveness rank high among your must-haves in a lender, and you don't fit the ideal mold of what traditional lenders are looking for, consider a peer-to-peer loan.

Margin accounts

Best for borrowers with a high tolerance for risk

If you have a margin account with your broker, you can borrow against your eligible securities. Your stocks and bonds serve as collateral for your loan the same way a home serves as collateral for a home loan.

Rates on margin loans can be lower than unsecured loans like personal loans and credit cards, but may not be as low as home equity loan or HELOC rates. For example, Fidelity's base margin rate is currently 11.575%. The rate you'd pay may be slightly higher or lower depending on your account balance.

To activate the margin account, you must a sign a margin agreement, which explains how much you can borrow (typically 50% of your equity) and the percentage of equity you must maintain in the account (typically 30%-35%) to prevent a margin call — a dreaded request by your broker to replenish the account with additional money or securities if its value slips below a certain level.

You can use your boosted purchasing power to buy more stocks than you otherwise could, or to remodel your kitchen at an interest likely lower than taking out a personal loan or running up your credit card.

When markets are bullish, a margin loan may seem like a great time to reward yourself. Sure, there's interest to pay on the loan, but you could pay it out of your gains.

Yet, if one of your stock positions unravels, setting off a margin call, the call could upset your asset allocations and trigger capital gains taxes, potentially imperiling your cash flow and retirement goals.

Public agencies

Public agencies provide financial assistance, but they are not always easy to navigate. You can't just show up at the door of the Federal Emergency Management Agency (FEMA) and request a loan the way you might from your local banker. In fact, FEMA doesn't even make loans.

That said, it makes grants, which are better than loans.

FEMA grants

Under its Serious Needs Assistance program, FEMA gives a one-time direct payment to eligible disaster survivors for food and other emergency supplies. FEMA grants are also available for longer-term help and recovery - individual FEMA grants provide up to $43,600 for assistance under the Individuals and Households Program (IHP).

To apply, visit DisasterAssistance.gov or call the FEMA Helpline at 1-800-621-336212. Eligibility is based on living in a presidentially declared disaster area.

SBA loans

Meanwhile, the Small Business Administration (SBA) provides loans to get small business owners and non-owners on their feet again in the wake of recent hurricanes like Helene and Milton. The SBA is not a direct lender. Rather, it guarantees a portion of loans the local lenders make.

Despite its name, SBA loans aren't that small. It provides $100,000 for personal property disaster loans (to replace personal items like clothes and furniture) and $500,000 for real property disaster loans (to repair or replace your primary residence). Qualified businesses and most private nonprofit organizations may be eligible for even larger amounts to cover disaster losses not fully covered by insurance.

If you're not digging out from a disaster and just need cash to start a new business or sustain your current one, you can apply for a SBA 7(a) loan (up to $5 million) or a SBA microloan (up to $50,000).

To apply, call the SBA's Answer Desk at 1-800-827-5722 or visit [email protected].

But the best place to begin your search for assistance may be right in your own back yard, through your area economic development department. It will be aware of current federal loan and grant programs administered by the U.S. Department of Housing and Development (HUD) and the U.S. Department of Agriculture (USDA), as well state and local assistance programs.

Family and friends

Best if you want to keep interest payments in the family

The idea that you would profit from loans by charging interest to family and friends may seem Scrooge-like. After all, if you can't help out a family member, what is family for?

But not all share that view. Sonal Bagga, founder of Namma, a New York City-based company that structures loan agreements between borrowing and lending family members, believes such formal arrangements can reduce family tension and promote financial and educational harmony long past the expiration of any loan term.

“When you formalize these monetary exchanges, everyone feels more supported throughout the process,” Bagga said. “The loans say more about your social credibility, respectability, and viability within the family circle than about your financial credibility.”

Intrafamily loan agreements

At the same time, the legal agreements that Namma, National Family Mortgage, and other family-focused lenders provide, help consumers stay on the right side of the law. 

For private loans, the IRS has long set minimum interest rates, known as applicable federal rates, to prevent the lending relatives from disguising their outright gifts as loans to avoid paying gift taxes. The IRS expects you to charge interest on loans you make and will tax you accordingly, even if you didn't charge that interest — this is known as imputed interest.

There's another unseen benefit to these agreements. If a friend or family member defaults without an agreement, it will be difficult for either the lender or borrower to write off the loss without proper documentation. Family lenders provide the paperwork, send out payment reminders, and will even go to court on your behalf.

But mostly, family lending is about family wealth preservation. It keeps the payment of interest all in the family. “Why give it to a bank?” Bagga asks.

There you have it, 10 of the best ways to borrow money. Your challenge, as always, is to find the best ways to borrow so you can manage that debt well.

Read More:

• What Is a Lending Circle?
• What Are the Requirements for a Personal Loan?
• How Long Does It Take To Get a Personal Loan?
• How Much of a Personal Loan Can I Get?
• Should I Get a Personal Loan?
• How To Compare Personal Loans
• Best Personal Loans