This table summarizes the pros and cons of different ways of borrowing money. When you're looking at more than one borrowing option, you can use this table to evaluate them against each other.
WHAT'S THE BEST WAY TO BORROW?
Source of Funds
Interest Rates
Fees
Availability
Tax-Deductible Interest
Risk Factors
Refinance Your Home Mortgage
If market rates are lower than your current rate—check it out
If you stay in the home long enough, you will eventually break even.
Fairly easy
Generally yes
Risk of losing home if in default
Home Equity
Typically lower than most other loans
Low
Easy
Generally, If used to "buy, build, or substantially improve" the home that secures the loan
Risk of losing home if in default
401(k) Plan (If Available)
Fairly low
Little, if any
Easy
No
Risk of depleting retirement fund if you leave and cannot pay the loan back. There is also an "opportunity" cost when market is rising. Additionally, the loan may be considered a taxable withdrawal if still outstanding when employment ends.
Life Insurance
May be low
Depends on insurance company
Easy if you have sufficient cash value in your policy
No
If loan is not repaid, proceeds at death will be reduced and interest on unpaid amount may continue to compound.
Business Loan
Moderate
Depends on purpose of loan
Difficult
Yes
Business assets may be at risk
Secured Personal Loan
High
Little
Difficult
No, unless money is used to purchase investments
Collateral at risk
Unsecured Personal Loan (Credit Cards)
Highest
Little
Moderate
No
Temptation to accumulate expensive debt quickly
Relatives or Friends
Depends
None
Difficult to find a willing lender
No
Jeopardize relationships
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