Best ways to borrow money

Please note: Discover® offers home equity loans, credit cards, credit card cash advances,  and personal loans but does not offer HELOCs, automobile financing, student loans, payday lending services, retirement loans, auto title loans, pawnshop loans, or tax refund anticipation loans.

There are many different ways to borrow money, with each financing type having pros and cons. Understanding how credit options work can help you make smarter decisions when borrowing cash. 

Home equity loan and home equity line of credit (HELOC)

After you’ve built equity in your home, home equity loans and HELOCs (types of second mortgages) may let you tap into that equity to access cash.

Learn More: How to build equity in your home in 10 steps

PROS: 

• Home equity loans and HELOCs can be used for many purposes, such as home improvement and major expenses like weddings or education. 
• If your main or second home secures your home equity loan or HELOC, and you “buy, build, or substantially improve” that residence, you may be able to deduct the interest you pay each year on the loan. However, this is subject to certain dollar limitations and other conditions, so consult a tax advisor to learn more.
• Interest rates for home equity loans and other secured loans may be lower than unsecured loans.
  

CONS:

• Because of the size and complexity of these loans, the approval process may take longer than other loans. 
• Your house is used as collateral for these loans — so if you cannot make all payments on time, it may be at risk of foreclosure. 
• Like mortgage refinancing, home equity loans and HELOCs may have longer repayment periods than other types of loans, potentially increasing the total amount of interest you’ll pay over the length of the loan.
  

SOURCES: Banks, other financial services

WHEN TO USE THIS OPTION: Home equity loans and HELOCs may be a good financing option if you want to capitalize on the equity in your home. You can use the cash for whatever you like and potentially benefit from tax savings.

Credit cards

With a debit card, you’re withdrawing money from your own funds. A credit card  lets you borrow cash when you need it.

If you pay the money back in full by the due date, you normally won’t pay interest. However, if you pay less than the full amount, you typically pay interest on the outstanding balance.

PROS: 

• The grace period of the credit card — the time required for repayment before a lender charges you interest — is usually around 21 days. 
• New credit card purchases up to your credit limit don’t require new loan applications. 

CONS: 

• Late payments may result in you paying more in interest, as well as fees. 
• An unpaid balance may continue to accrue interest charges until you pay it down. 
• Some cards have annual fees.

SOURCES: Banks, other financial services, retail organizations, service organizations.

WHEN TO USE THIS OPTION: A credit card may be useful for funding large purchases, building your credit, and earning rewards like cash back or travel miles. However, you’ll want to repay your balance as quickly as you can to avoid interest charges.

Credit card cash advance

A cash advance on a credit card lets you withdraw cash from your credit card account. 

PROS: 

• You can access cash quickly. 
• Since you have already qualified for the card, your lender might not carry out a new credit check. 

CONS: 

• A transaction fee may be charged.
• Interest charges usually begin from the instant the cash advance is provided.
• The interest rate may be higher than regular credit card purchases.

SOURCES: Banks, other financial services, retail organizations, service organizations.  

WHEN TO USE THIS OPTION: A credit card cash advance could help if you need fast cash for an emergency and don’t want to undergo a credit check.   

Personal loan

A personal loan is not normally secured by collateral, such as a home or a car, and may be used to consolidate debt or provide funds for a major expense or unexpected bill. Approval is typically based on your credit score, income, and other factors.

PROS: 

• Personal loans normally have a fixed monthly payment, which may be helpful for budgeting. 
• Paying off credit card balances with a personal loan may reduce credit utilization on each card.
• These loans can be used for many purposes, such as paying for medical bills or a vacation. 
• Personal loans typically have faster application timelines than mortgages.

CONS: 

• Personal loan rates may be higher than some other financing types, such as HELOCs. 
• Personal loans are normally unsecured, meaning more risk is involved for lenders.

SOURCES: Banks, other financial services.

WHEN TO USE THIS OPTION: A personal loan may provide access to funds if you don't have any collateral and want to make consistent monthly payments over the life of the loan.

Car loan

A car loan can help you pay for a new or used vehicle.

PROS: 

• With a car loan, you can buy a vehicle without paying the full price upfront. 
• A car dealer may provide an instant credit decision.

CONS: 

• As the loan is usually secured, your car could be repossessed if you do not make all payments on time.

SOURCES: Banks, other financial services through car dealers.

WHEN TO USE THIS OPTION: If you need a new vehicle but don't have the money to pay for it all in one go, a car loan may help.

Student loan

A student loan can help you pay for education-related expenses.

PROS: 

• Federal student loans may have lower rates than private student loans. 
• Some student loans, such as Direct Subsidized and Direct Unsubsidized federal loans, have a six-month grace period after leaving college and starting repayments.

CONS: 

• Starting adult life with a big debt burden may be troublesome.

SOURCES: Banks, other financial institutions, the federal government.

WHEN TO USE THIS OPTION: A student loan is one way to cover the expenses of attending school if you have little or no access to other financial resources, such as scholarships. 

Payday advance

This is the generic name for a short-term, high-interest loan that can provide emergency funds until your next payday. Usually, you write a check for the borrowed amount plus a fee and repay the total from your checking account after a short, fixed term. 

PROS:

• Generally, no credit checks are needed.
• Access to cash is fairly quick.
• For those without credit, this may be one of the few borrowing options available.

CONS:

• Payday advances typically have high interest rates, maybe even as much as a triple-digit annual percentage rate (APR).
• Extending the loan may incur an additional fee. 

SOURCES: Online and brick-and-mortar providers.

WHEN TO USE THIS OPTION: You may need a payday advance if no other credit options are available. However, be aware of high interest rates.

Retirement loan

This is a type of secured loan where you borrow from the personal funds in your 401(k) or other retirement accounts. You can’t borrow against Individual Retirement Accounts (IRA)s.  

PROS: 

• Borrowing costs for 401(k) loans might be lower than other types of loans.

CONS: 

• If you do not repay your loan, including interest, unpaid amounts will be treated as a plan distribution, which can have tax consequences. You may also have to pay a penalty on the amount of the tax distribution unless you’re at least 59 and a half or qualify for another exemption. Consult a tax and/or investment professional to learn more.    
• The purpose of a retirement account is saving for your later years, so borrowing against it is counter to that intent.

SOURCES: Financial service where your retirement funds are held.

WHEN TO USE THIS OPTION: A retirement loan lets you access funds for your retirement to cover a short-term need or unexpected bill. 

Borrowing options to be cautious of 

The following financing options may have high costs, so consider them carefully: 

• Auto title loans: Auto title loans let you borrow money by using the equity in your vehicle as collateral. You then repay the amount with fees, usually after 15 or 30 days. These fees may be as high as 25% per month, which is an APR of around 300%. 
• Pawnshop loans: With this type of loan, you provide a pawnshop with an item of value as collateral and get it back once you repay the loan with interest. Like auto title loans, the cost of a pawnshop loan may be more expensive than tapping into other possible sources of funds. 
• Tax refund anticipation loans (RAL)s: You may be able to take out a short-term loan from a tax preparer if you're expecting a refund from the Internal Revenue Service (IRS), with the amount you borrow being deducted from the money you get back. This type of loan often has extremely high interest rates, so you may want to explore other borrowing options.

Factors to consider when borrowing money

Think about the following things when weighing up the pros and cons of different borrowing options: