Yahoo Finance 6 Ways To Borrow Money That Are Cheaper Than Using a Credit Card
More Americans are turning to credit cards when they’re low on cash, but financial advisers say they should be a last resort.
I’m a Financial Advisor: 10 Most Awesome Things You Can Do for Your Finances in 2024
Learn: How To Get $340 a Year in Cash Back – for Things You Already Buy
According to the New York Federal Reserve, credit card debt hit a new record, reaching $1.03 trillion in the three months ending in June. The average interest rate for those who carry a balance has increased to 24.59%. If you’re opening a new card, it can get as high as 28.07%, according to Lending Tree.
And interest payments add up, especially if you only make the minimum monthly payment.
If you have $10,000 in credit card debt with a 24% interest rate, it could take anywhere from 11.75 years to pay the total plus $6,553.58 in interest up to 29.5 years to pay off the total and $19,332.21 in interest, depending on how your minimum payment is calculated, according to CBS News.
Financial experts say Americans should look at less expensive ways to tap short-term liquidity if they don’t have enough emergency savings, like life insurance, family and friends and even their 401(k) and banks.
“Using your credit card now should be the ground floor,” Dan Casey, investment adviser and founder of Bridgeriver Advisors in Bloomfield Hills, Michigan, explained to USA Today.
Discover: 6 Old-Fashioned Frugal Living Tips That Still Work (And Can Save You Big Money)
Credit cards are okay for small purchases that you can pay off monthly, but if your balance continues to grow, experts say to use these less expensive options.
1. Life insurance: Universal or whole life insurance typically includes a cash value feature allowing you to have a tax-free, low-interest rate loan and keep your money invested. Casey said it’s fast and only takes days to deposit into your account. The only fee is the interest rate, and you don’t have to pay it back until you’re able to.
2. Family and friends: There’s no harm in asking family and friends to loan you money. Casey said you can even include a 5% interest rate and a contract.
3. Home equity loan: Because home equity loans use your home as collateral for the loan, interest rates are typically lower and terms are flexible. The interest is tax-deductible if you’re using the funds to build or improve your home. The only downside is that getting one can take up to two months.
4. 401(k): Interest rates are lower than other loans, and you pay the interest back to yourself instead of the lender. They’re also tax- and penalty-free and do not impact your credit score. Repayments are typically deducted from your paycheck. However, USA Today warned that you must fully repay the loan if you lose or change your job. A default is also considered a withdrawal, and you’ll owe taxes and a 10% penalty if you’re under 59.5 years of age.
5. Personal loan: Interest rates depend on your credit score and history, the amount you need and the lender’s requirements. Casey noted that a personal loan may be better than a 401(k) loan if you can get a low rate. If you pay off the loan early or miss a payment, there are typically penalties or fees.
6. 401(k) hardship withdrawal: Hardship withdrawals don’t need to be repaid, but they are permanently removed from your retirement account. There are strict rules, and you must also pay taxes and penalties on the withdrawal.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: 6 Ways To Borrow Money That Are Cheaper Than Using a Credit Card
