Forget Credit Cards -- Here Are Some Cheaper Borrowing Options

by Maurie Backman | Updated July 21, 2021 - First published on April 5, 2021

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Someone signing loan paperwork and being handed money.

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Before you swipe a credit card, consider these more affordable means of borrowing.

Sometimes, unplanned expenses can pop up at the worst times. Your car might break down or you could face a home repair. Or you could lose your job, which isn't an expense per se, but it leaves you in the same boat of needing money in a pinch. In those situations, you could tap your emergency fund -- if you have one.

But what if you don't have emergency savings, or that money runs out? If you need to borrow, you might assume that credit cards are your best fallback option. But actually, here are a few more affordable avenues to look at.

1. Personal loans

With a personal loan, you can borrow money for any purpose, and these loans tend to offer more competitive interest rates than what credit cards charge. Also, with a personal loan, you'll generally pay a fixed interest rate on the amount you borrow, so your payments won't go up over time. Credit card interest, on the other hand, can be variable.

To qualify for a personal loan, you'll typically need a decent credit score since these loans aren't secured by a specific asset (like a home or valuable item). But there are personal loans for borrowers with poor credit as well -- you may just get stuck with a high interest rate if your score needs work.

2. Home equity loans or HELOCs

With a home equity loan, you borrow a certain amount of money against the equity you have in your home. (Equity is the portion of your home you own outright.) You then pay back that sum over time, as you would with a personal loan. With a HELOC, which stands for home equity line of credit, you get a credit line you can draw from within a specific time period -- usually up to 10 years. Then, you simply pay back the amount you end up borrowing.

Both options are fairly easy to qualify for if you have enough equity in your home, and they can be even more affordable than personal loans from an interest rate perspective. Also, these options work well for homeowners whose credit isn't great, since eligibility hinges more on available equity than creditworthiness. (Though credit score does play a role as well.) The flipside is that if you fall behind on payments toward your home equity loan or HELOC, you could risk losing your home, since your property will be used as collateral for whichever option you choose.

3. Cash-out refinancing

If you have a lot of equity in your home, a cash-out refinance is also an option. With a cash-out refinance, you borrow more than your remaining mortgage balance and get the rest of that money to use as you please. The downside is that if you fall behind on your loan payments, you'll risk losing your home. But based on where today's refinance rates are sitting, you'll pay significantly less interest on a cash-out refinance than you will on a credit card, or even on a personal loan, home equity loan, or HELOC, for that matter.

To qualify for a cash-out refinance, you'll need more than just solid home equity. You'll also need a strong credit score, since you're effectively signing a mortgage all over again. And you'll need to prove to a lender that you have a steady income source that makes it possible to keep up with your new loan payments.

Don't rush to swipe that card

If you need money and haven't come close to maxing out your credit cards, you might assume that charging expenses on them is your best option. After all, it's quick, it's easy, and you don't have to go through the process of applying for more credit because it's already available to you. But remember, credit cards are notorious for charging a lot of interest, which will only make your debt more expensive to pay off. You're better off seeking out cheaper alternatives that cost you less and make the payoff process easier on the whole.

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