Best Ways to Borrow Money: From Cheapest to Most Expensive

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• You have options to get money by borrowing against your assets to taking out an unsecured loan.
• Borrowing against assets tends to be cheaper, but you must own the assets in the first place.
• If those aren't options, one of the best personal loans or credit cards could be a better fit. 

There isn't a perfect solution for borrowing money.

One option is to borrow from family and friends, but experts often warn against it since these types of loans can strain relationships.

Or, you could borrow from your retirement savings. Amidst the job loss and financial troubles of the coronavirus outbreak, the US government's $2 trillion stimulus package allows penalty-free withdrawals and loans from 401(k)s. Experts caution that this can be risky, however: If you get laid off or change jobs, repayment is due immediately, and borrowing from your retirement account could cause you to miss out on growth over the years.

Borrowing against your assets, like your investment portfolio or your home, or borrowing from a bank could be better alternatives. Bear in mind, though, that any method will cost you interest, and you'll be responsible for paying back the loan in full.

Best Ways to Borrow Money

If you're short on cash, here are a few ways to get money you need, from the least to most expensive.  

1. A 401(k) loan

Typical interest rate: WSJ prime rate +1%

Who can use one? Borrowers with a 401(k) balance

Since you're borrowing your own money, the interest isn't paid to a lender. Instead it goes back into your 401(k) account. There's also no credit score evaluation to get a 401(k) loan. The IRS does limit how much you can borrow — whichever is less between $50,000 or 50% of your vested 401(k) balance within a 12-month period.

However, any funds borrowed from your 401(k) won't grow, so this type of loan can have a significant impact on your financial future. 

You typically have a five-year period to repay the loan — but if you lose your job during the repayment process, the remaining loan amount may be due immediately. If you can't pay back your 401(k) loan by the close of the tax year, the IRS will consider the remaining balance a distribution and you'll need to pay taxes as well as a 10% early withdrawal fee penalty on the amount.

How to apply for one: Ask your employer about their 401(k) loan options and fill out the necessary paperwork. 

2. A home equity line of credit

Typical interest rate: 7.49% average heloc rate as of July, 2023

Who can use one? Homeowners who have at least 20% equity in their homes

Home equity lines of credit, also known as HELOCs, are popular ways to borrow at interest rates much lower than most credit cards or personal loans can offer. This option is only available to homeowners with equity in their homes, so it might not be the right option for everyone. 

HELOCs generally limit the amount you can borrow at 85% of your home's equity, or 85% of the amount it's worth minus what you owe on your mortgage. With this type of loan, you borrow what you need as you need it, since the line of credit stays open almost like a credit card.

However, it does mean that you're putting your home up as collateral — you risk losing your home if it isn't repaid. When used correctly, however, it can help you leverage the value you have built in your home at a low interest rate.

How to apply for one: Apply for a HELOC through any major bank that offers them. You'll give information about your home, your mortgage, your income, and more. Then, you'll need to have your home appraised. Finally, close on your loan and start drawing on your funds. 

3. A home equity loan

Typical interest rate: 8.39% on average, according to Bankrate.

Who can use one? Homeowners who have at least 20% equity in their homes

While a home equity line of credit and a home equity loan might sound similar, and even both be referred to as "second mortgages," they're rather different. A home equity loan also borrows against the equity in your home, but it operates more like a traditional loan than a HELOC does. The payment comes as a lump sum rather than on an as-needed basis, and will have a fixed interest rate, monthly payment, and repayment date. 

Home equity loans are a great alternative to personal loans for homeowners — they function like a personal loan without the variable interest rate and revolving credit that come with a HELOC. Like a home equity line of credit, your house is used as the collateral, which puts it at stake if you don't repay the loan. A home equity loan best for someone who knows how much they need to borrow, want a fixed monthly payment while repaying, and wants to only receive the funds once. 

How to apply for one: Banks and lenders offer home equity loans, and the application is similar to that of a HELOC. You'll need to have information about your home, mortgage, and income, and have an appraisal. Then, you'll close on your home equity loan, and receive the funds you borrowed as a lump sum. 

4. A credit card

Typical interest rate: 20.92% average credit card interest rate

Who can use one? People with good or better credit, typically a minimum of 670 for a 0% APR credit card

Credit cards are a notoriously expensive way to borrow money. If you don't pay off your balance every month, the high interest rate means borrowing that money gets expensive, fast. So if you're considering putting your expenses on a credit card and know you can't pay them off immediately, you might want a credit card with an introductory 0% APR. 

These 0% APR cards give you a period of interest-free credit, generally between nine and 21 months, depending on the card. If you pay off your balance in full before the 0% interest rate expires, it could mean free borrowing. These cards are often referred to as balance transfer cards, because you can move your balance from another card (for a fee) to take advantage of the introductory rate. It's a good option to cover small bills and purchases for anyone who's confident they can pay back the funds quickly.

However, note that after the introductory period ends, the card will apply a regular (read: high) interest rate to the existing balance. If you aren't going to pay off your balance in time, it might not be the best borrowing method for you.

How to apply for one: To get an introductory APR offer, you'll need to open a new card. Check your credit score for free online, and then apply for a card that fits your credit score (perhaps one of the best 0% APR credit cards). After applying for your card, look for any fees, and look for a term that will fit your plans for repaying. Once you apply for and get your new card, make sure to note when the interest rate will increase and plan to pay off your balance before then. 

5. A personal loan from a credit union

Typical interest rate: The average interest rate for a personal loan is 20.96% as of July 2023. Credit Union rates are capped at 18%.

Who can use one? Any credit union member with a good or better credit score

Credit unions often charge less interest than banks on their loans, but they restrict loans to members. According to data from the National Credit Union Association and S&P Global, these member-owned, local institutions offer personal loans for an average of .8% cheaper than national banks in December 2019. 

 How to apply for one: If you're already a member of a credit union, you can apply there. If not, joining one is generally pretty simple, but note that many have simple membership requirements, like living in a certain area. Apply on the credit union's website or at a branch. While they can be cheaper than bank loans, that's not always the case, so it's smart to compare offers with online lenders and other banks to make sure it's the best deal for you. 

See our picks for the best debt consolidation loans »

6. A personal loan from a bank

Typical interest rate: 20.96% as of July 2023.

Who can use one? Anyone with a good or better credit score. 

Personal loans have high interest rates, but there's no limit on what you can do with the money. According to Sipes, a personal loan is a last resort. 

While it's possible to find interest rates under 4% on the best personal loans, like those offered by Lightstream, it's only possible to get rates that low with the best credit scores. More frequently than not, interest rates start at 6%, and can go into the mid 30% range. Additionally, some lenders charge percentage-based administrative or origination fees. 

Personal loans aren't the most affordable way to borrow, but they are often unsecured loans, meaning that you won't have to put up any collateral, like a home or car, for the loan. For someone without a home or a large investing portfolio, a personal loan might be the best bet. 

How to apply for one: Search for a personal loan that fits your income, credit score, and needs. Pre-qualify with several different lenders online, and look for the lowest APR available to you. Next, gather information about your income, expenses, and more, and finish the application. 

Bonus: A portfolio line of credit

Typical interest rate: 7.40%, according to Wealthfront

Who can use one? Investors with a significant portfolio and net worth. Minimum portfolio requirements vary by company.

Another way to borrow money is a portfolio line of credit, also called borrowing on margin. "Anyone who has after-tax money in an investment portfolio can utilize a portfolio line of credit," says Monica Sipes, a financial planner with Exencial Wealth Advisors.

However, there's a catch: You have to have a significant investment portfolio to take advantage. This type of loan works by allowing the bank to lend against your portfolio. Wealthfront requires that customer have a portfolio valued at over $25,000, for example. TD Ameritrade requires a net worth of $750,000 to be able to borrow, says financial planner Levi Sanchez. "I recommend them more so for a higher net worth client," he says. 

"The cool thing about those types of loans is that they're generally interest only, so it gives the borrower a lot of power in terms of when to pay back," adds Sipes. "They have very aggressive interest rates right now, meaning that they're inexpensive." Additionally, portfolio lines of credit are available rather quickly, as there's far less paperwork involved with this than a loan or other lines of credit.

How to apply for one: Online banking service Wealthfront offers these portfolio lines of credit, and allows investors to borrow up to 30% of their taxable account balance. Interest rates are low: Wealthfront charges interest rates between 7.40% - 8.65%. They're also available through other investing platforms and banks, like Bank of America and Morgan Stanley.

Borrowing from friends or family

As everyone's relationship with their friends and family looks different, this may not be an option for all borrowers. That said, if you are able to borrow money from your friends or family, you can often get a low or no-interest loan. This set-up is a better deal than most of the options listed above. 

Borrowing options to avoid

Not all borrowing options are created equal. Here are a couple of borrowing options to avoid if possible: 

Using a payday loan

A payday loan is a high-cost, short-term unsecured loan that has a principal that is a portion of your next paycheck. Payday loans are often for small amounts of money, commonly $500 or less. Payday loans provide immediate funds, come with extremely high interest rates, and are usually based on your income.

Payday loans make it easy to fall into a cycle of debt. If you fall behind on payments, the interest you're being charged can continue to add up until you may struggle to pay it back. Your options to put your loan in forbearance (pause your payments), are also limited with payday loans. 

Using a cash advance

Cash advances are a slightly better option than payday loans — they come with lower interest rates and fees than payday loans. Cash advances are often available through your credit card issuer or various apps. 

However, the repayment term is usually based on your pay cycle, and may make it hard to keep up with your financial obligations. 

Frequently asked questions

What is the best way of borrowing money?

The best way of borrowing money is through lenders that charge minimal or no interest rates. Borrowing from friends and family can be a good option, as can borrowing against any assets you hold. 

What is the best way to borrow $5,000?

To borrow a larger sum of money, like $5,000, you may consider taking out a personal loan. Personal loans often have higher borrowing limits than other forms of loans. 

What is the easiest way to borrow money?

The easiest way to borrow money depends on what assets you have available. Generally speaking, it's easier to borrow money against assets you hold, like a house or a retirement account. 

How can I borrow money without hurting my credit?

So long as you make on-time, reliable payments, borrowing money won't hurt your credit no matter how you do it. The amount of money you take out isn't as important as your plan to repay it consistently.