What is the cheapest way to borrow money?

If you need to take out a loan for an emergency, big purchase, or to consolidate debt, you’re probably looking for the most affordable way to borrow money. When you need financing, the last thing you want to do is take out loans that add to the balance with high-interest charges or hidden fees.

Everyone’s situation is different, and there isn’t a one-size-fits-all solution for borrowing money. The cheapest way to borrow money is to examine all of your options and choose the financial product that best fits your situation and needs. Here are three of the best ways to do that.

Zero-percent credit cards

If you need money to make purchases, borrowers may find that a credit card is the quickest way to get funding—but it comes with a caveat. If you use an existing credit card, you'll likely pay high interest. According to the Federal Reserve, the average rate on a card that is assessed interest is nearly 17%. That can be an expensive way to borrow.

For example, if your credit is good, you may qualify for a card that charges 0% interest during an introductory period, which can range from six to 18 months and even longer. You will need to make regular minimum monthly payments but as long as you can pay off the balance before the end of the introductory period, you will not be charged any interest on the loan. And you can transfer balances from other cards if you want to consolidate debt.

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However, if there’s a chance that you won’t be able to pay off the card in full, this may not be your best choice. If you don’t pay the entire balance before the end of the introductory period, you will be charged all the interest at the standard rate that starts to accrue from the date of the purchases. Some zero-percent credit cards may charge an annual fee. And depending on what you need the money for, credit card credit limits may be lower than what you need.

Unsecured or personal loan

Another option can be a personal unsecured loan. Lenders will offer borrowers personal loans that range from $1,000 to as much as $100,000, which can be helpful if you need to borrow a more significant amount than a zero-interest credit card offers. With a personal loan, you don't need to put up collateral. Personal loans can be taken out for one to five years or even longer and they can be less expensive than using a credit card.

However, rates can vary greatly, ranging from 4.99% to 36%. To get the lowest rates, you will need to have a good to excellent credit score. Personal loans require that you make fixed monthly payments. While it can take longer to get a personal loan than a credit card, some online lenders will offer instant decisions.

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Home equity

If you own a home, you might consider borrowing against its equity. This can be an affordable way to borrow money for more substantial amounts or longer terms. The average interest rate on a home equity line of credit is 4.37%. You can also choose a cash-out refinance in which you take out a new mortgage with an amount that can pay off your existing mortgage and have cash left over to use for what you need. Rates for a mortgage refinance start at 2.5% for a 15-year loan and 3.1% for a 30-year loan. Rates are lower than a personal loan because your home secures this type of funding.

PERSONAL LOAN OR HOME EQUITY LOAN: WHICH IS BETTER?

Lenders usually require that you have at least 20% equity in your home to borrow from it. Interest rates on home equity lines of credit can be variable, which means your payment may increase if the rate goes up. You may also have to pay closing costs, which can be expensive. Since your home secures the loan, you put it at risk if you aren't able to repay the amount. This may not be the best choice if you're borrowing money to consolidate unsecured debts.

The most affordable way to borrow money is to choose a loan with rates, terms, and fees that don't overwhelm your budget. Whichever vehicle you choose, make sure you can repay what you borrow so it doesn’t hurt your financial situation.