In this post were going to look at some different ways to raise cash and borrow money if you find yourself in need of funds. Not all of these methods are recommended but were going to look at some of the pros and cons of each one.
Family Loan
If you find yourself in need of some extra cash the family loan might be worth considering. On the pro side of things a family member is less likely to foreclose on your house and you may be eligible loan rather quickly without the paperwork involved in going and getting a loan from a bank. On the con side of things it could potentially strain your relationship with family members. If you think there’s a chance you won’t feel the pay the money back is probably better not to borrow from your family. The exception would be if you have a family member that would miss the money and it wouldn’t ruin your relationship if you for some reason weren’t able to pay it back or at least were able to pay it back right away. What you want to avoid is a situation where you cause a family member hardship because of your poor financial planning and an inability to repay the loan Erie it
If you do borrow money from family is suggested that you treat it as a formal loan. Make sure you write up the paperwork etc. This is for a few different reasons. One you want make sure you both are thinking the same thing about when the loan will need to be repaid etc. Erie it the other reason is if for some reason you have to default on the loan the IRS will treat it differently depending on whether or not there is documentation. If it’s a bona fide loan and can be proved with the paperwork the family member that loaned you money can take as a loss. If there isn’t paperwork the IRS may just consider it to be a gift instead of alone and they will not be overtaken the type of production.
Home Equity Line of Credit
If you have some equity in your home a home equity line of credit is one of the cheapest ways to borrow money. Since it will be back by the value of your house it usually has the lowest interest rate of pretty much any type of loan. The downside of course is that home equity loan is backed by your house so if you default they can take your home.
As with any loan you want to be careful not to get in over your head. Still the home equity line of credit is a great way to make use of value that you already own. It typically carries the lowest interest rate and can often be set up in a way that you can borrow the money when you need it without having to take out additional paperwork. This is where the line of credit comes in. The line of credit allows you to borrow as you need and pay back is you need only pay interest on the money that you have outstanding.
Credit Cards
Generally credit cards are one of the worst ways you can possibly borrow money. Well maybe not the worst way but one of the worst ways. However under certain circumstances you may be able to get a reasonable interest rate on money borrowed from her credit card at least for a short period of time.
Also if you pay off your balance at the end of the month there is generally no finance charge. This means that you can borrow money for about 30 days without having to pay interest on it. Most of the time this is a great strategy if you don’t have the money to pay off the credit card. It’s very easy to get into a situation where you now have very high interest debt that you had intended to pay off but do not have the funds to do so.
Refinance
Another way to get a hold of some cash is to refinance your house and take cash out. If you all $150,000 on your house and it is worth $300,000, you can likely get a loan for to earn $240,000 and take $90,000 out. This allows you to tap the resources tied up in the assets of your house. Since it’s an actual mortgage the interest rate is probably as low as you’ll find on any type of loan.
Recent rules have changed and this may be more difficult to do than it has been in the past. In particular banks want to make sure that your house is worth at least the amount of money they’re loaning you on. Generally you want to keep at least 20% equity because without that you’ll have to pay mortgage insurance.
One of the best uses of cash out refinancing is to improve the value of your house. For example if you want to remodel your kitchen, making addition, or make other improvements that will make your house more valuable this can be a good strategy. It allows you to get the lowest interest rate possible while still paying for your home improvements without taking out a higher interest rate loan from somewhere else.
Borrow Against 401k
Certain types of retirement accounts will allow you to borrow money against your investments. In some cases you’ll need to move your investments from the mutual funds into a cash only interest-bearing account. The downside of this is that if the market goes up dramatically you will miss out on those gains for your retirement. On the other hand interest rate is generally very low and in some cases the interest may go directly to your retirement account. In other words you are actually paying someone else interested coming back to you when you retire.
This can be a good strategy if you have a lot of money tied up in retirement and don’t want to forgo retirement savings in order to keep cash around for potential purchases.
Borrow from IRA
Unlike 401(k)s there is no way to borrow directly against or from the funds. However you can roll your IRA account from one broker to another. This gives you a 60 day period in which you can use the money for whatever you like as long as you have it back in a new brokerage account by the deadline. If you don’t have it back in another account you will be subject to tax on the IRA funds in addition to a 10% penalty.
This is generally a very bad idea. However in a few circumstances it might allow you to take advantage of an investment opportunity that you would not be able to otherwise. However this should be a very last resort. A lot of people take money out of an IRA account and never put it back and then owe very large tax bills.
Payday Loans
Payday loans rank right up there with credit cards in terms of bad ways to borrow money. Payday loans charging exorbitant interest rate. They are dealing with clientele that are generally not very financially savvy, have a high likelihood of defaulting, and have very few other options. If you go take out a payday loan you’re going to pay a very high interest rate in order to subsidize all the people who take out loans and don’t pay them back.
In some cases payday loans will charge more interest than a credit card company and in some cases your liability should you default is much greater than what you would have with a credit card company.
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