When you need money, whether it’s to pay for your child’s education, purchase a new home, or to pay your bills, it can be tempting to turn to your 401k. However, even if you think that you have plenty of time to pay back the money you borrow from it, you could be facing serious penalties for dipping into it. These penalties are designed to discourage you from withdrawing early and using the money for purposes other than retirement, and you could lose up to 50% of your investment for doing so. Instead of being faced with these penalties, and losing your hard-earned money, there are plenty of other alternatives.
When it comes to personal loans, you have several options. These options are available at banks, credit unions, and online lenders. Your first option should be a unsecured loan. An unsecured personal loan often requires a good credit score in order for you to qualify. Interest rates are often over 10%. If your credit score drops while you are in repayment, or you miss payments, you risk your interest rate increasing.
Another personal loan option is a secured personal loan. This type of loan requires some form of collateral, and encompasses home equity loans as well as home equity lines of credit. Interest rates are lower — although they still depend upon your credit score — but the risk is higher. If you default on your loan, you could end up losing what you put up for collateral, whether it’s your car, your house, or some other valuable asset.
If the loan amount is smaller, then you can try an online lender; they often promote smaller loan amounts of $5000 or less. Some websites help borrowers get bad credit loans by working with lenders that can help those with poor credit, but be wary: these loans have high interest rates!
If you have a credit card, you most likely have access to a cash advance. These advances can be taken out through an ATM withdrawal, withdrawal from a bank, or by check. They’re fairly similar to a short-term loan. There is usually a transaction fee associated with a cash advance, and the interest rates are higher on these loans than the regular APR on your credit card. The interest rate varies by credit card company, but it is a viable option if you need money to cover a purchase that you can’t charge.
Peer to Peer Loans
Peer to peer loans — also knows as marketplace loans — are financed by people who are interested in investment lending. Much like any other type of loan, the interest rate for peer to peer loans vary based upon your credit score. With a good score, your interest rate could be as low as 5%. However, a poor credit score could mean an interest rate above 30%. There are also fees associated with these loans that depend upon your score. You may need to provide proof of employment; such as pay stubs in order to qualify. Sticking to the payment schedule, much like any other loan, is a must. Otherwise, you could be faced with late fees and damage to your credit score.
Borrow from Family
It may be awkward, but you can try borrowing money from a family member or friend. These loans are the least risky financially. However, borrowing from family or friends can strain a relationship, especially if you don’t pay the loan back in a timely manner. It usually helps to draw up a payment agreement, including interest, that the both of you can agree on.
If you find yourself in need of extra money, don’t dip into your retirement savings and risk losing a good portion of what you worked so hard to put in. With a little bit of research, you can find a better alternative that is more manageable and stay on a successful financial path.
Photo Credit: Infrogmation
Pam Martin says
Getting my family to lend me money is always the best route. They are more flexible with payments and they don’t charge me any interest.
Len Penzo says
As long as you pay it back promptly, I think that is the best route too. The trouble is, many people refuse to loan money to family members. My motto is: never loan money to anyone unless you are willing to accept you may never see it again.
Yeah, I’d take a loan from a bunch of places before approaching some people in my family…