A Smart Guide to Borrowing

By David Rodeck From Kiplinger’s Personal FinanceAs Americans face rising costs on just about everything, the amount of debt they’re taking on is going up, too. Credit card balances recently reached a record $1.28 trillion. And according to credit-reporting company Experian, 38 percent of U.S. consumers now have a personal loan, with the number of these loans on credit reports reaching 67.5 million. Both of those figures represent the highest levels since Experian started collecting data in 2017.For some, the strain of staying afloat is becoming more evident. The financial stress index from the National Foundation for Credit Counseling, which reflects the financial ability of consumers to repay unsecured debts, recently hit its highest level since the NFCC began tracking it in 2018.“I’m not surprised. I see a lot of people dealing with short-term financial pressure, and it’s been going on for a while,” says Leah Hadley, a wealth adviser in Cleveland. A large, unexpected bill can leave households with no choice but to take on debt if they don’t have a cash buffer to absorb the extra expense. (Or they may tap their retirement savings. Last year, about 6 percent of eligible participants in Vanguard 401(k) plans took a hardship withdrawal—an all-time high.) And while the unemployment rate was recently a relatively low 4.3 percent, the average time it takes job seekers to find work is the longest it has been since 2019. During an extended bout of unemployment, families may rely on credit or retirement savings to make ends meet.Ideally, you’ll have an emergency fund with at least three to six months’ worth of living expenses, stored in a safe, easily accessible place, such as a bank savings account. But if you exhaust those funds—or haven’t built them yet—you may have to look to other sources of cash in a pinch. Or, if you need extra money to finance a big project, such as a kitchen remodel, you may be looking to narrow down the best borrowing strategy.If you decide to borrow, the key is understanding how the loan fits into your finances and how you’ll repay it. This guide breaks down the main borrowing options and how to use them effectively. Zero-Interest Credit Card OffersFor short-term borrowing, a credit card with a zero percent introductory interest rate on purchases can be one of the most cost-effective options. These offers typically allow you to carry a balance for 12 to 21 months without owing any interest. If you pay off the balance in full before that window closes, it’s essentially a free source of borrowing.A few of the top options include Chase Slate, U.S. Bank Shield Visa and Wells Fargo Reflect, which all offer new customers a zero percent rate for 21 months.The trade-off: If you’re still carrying a balance after the promotional period ends, interest starts up, usually at a high rate, flipping an initially attractive offer into one of the most expensive sources of borrowing. The average credit card rate is about 24 percent, according to LendingTree.No-interest credit card offers make sense for smaller purchases that you can pay off relatively quickly, such as a car repair or furniture. “I don’t have a problem with zero percent offers as long as you treat them as a short-term bridge,” says Hadley. “You need a plan to get rid of the debt before the deal expires.” Home Equity LendingIf you own your home, you may be able to borrow against its value through a home equity loan or a home equity line of credit (HELOC). To qualify, you typically need to have equity—in other words, the difference between the value of your home and the outstanding balance on your mortgage—of at least 15 percent to 20 percent. You’ll also need to provide proof of income and have a decent credit score, usually of at least 680.Home equity loans, which provide you with a lump sum of cash up front, come with a fixed interest rate and set schedule of monthly payments that do not change. Average home equity loan rates were recently about 8 percent, according to Bankrate, though your rate will depend on how much you borrow, the length of the loan term and your creditworthiness. A home equity loan can make sense for a large, one-time purchase or expense, such as a home-renovation project.A HELOC is a revolving credit line that offers more flexibility, allowing you to borrow at your convenience, repay and borrow again over time. “Even if you don’t see a need right away, having a HELOC in place can give you access to cash in an emergency,” says Kenyon Sutton, a financial coach in Jacksonville, Fla. If you set up a HELOC and then lose your job, for example, you can still borrow against it. HELOCs recently had an average rate of 7 percent, according to Bankrate. But the rate is usually variable, meaning your monthly payment can go up and down based on market conditions.Because your home secures these loans, they typically come with lower interest rates and open the door to larger borrowing amounts than unsecured loans. While unsecured personal loans tend to max out at $50,000, home equity lending could allow you to borrow in the six figures or higher, assuming you have the equity to back it up.The trade-off is the level of risk. If you miss payments, you could eventually lose your home. These loans also charge up-front origination fees of around 0.5 percent to 1 percent of the borrowed amount. And you can’t turn to home equity loans if you’re in a hurry. They take time to launch because the lender has to evaluate your home’s value. Personal LoansWith a personal loan, you get a lump sum of cash and pay back the loan on a set schedule, usually between one and five years. You can see the scheduled repayments and total cost of the debt when you apply.On average, interest rates, at about 12 percent for those with decent credit, are lower than standard credit card rates. But unlike some credit cards, personal loans don’t come with an initial zero percent period, so you owe interest immediately.With that in mind, personal loans often make sense for borrowing that will take a few years to pay off, such as home improvements or a new appliance. Borrowers also commonly use personal loans to pay off their high-rate credit cards, refinancing the debt at a lower interest rate. You need to show proof of income to qualify for a personal loan, so don’t count on getting one to cover expenses if you lose your job.Personal loans are widely available through both online lenders and traditional banks or credit unions. Online lenders tend to offer a faster application process and approval, with funds often available within a day or two. Banks and credit unions take longer to process loan applications, but they can offer lower interest rates. And you may have a better shot at qualifying by getting in-person assistance from a representative, especially at financial institutions where you have a long-term relationship. “Online is faster, but there’s no one to advocate for you. There’s less flexibility on the borderline,” says Sutton. Buy Now, Pay Later Plans (BNPL)BNPL plans split purchases into smaller payments, typically charging no interest during this time. The standard BNPL plan lasts six weeks, though they can be stretched out to 24 months or longer for larger purchases.Used responsibly, BNPL can be a tool to spread out the cost of the occasional big-ticket purchase—say, to buy a new dishwasher after your old one breaks down. But BNPL’s convenience too often leads borrowers to overuse it, spending more than they can afford on food delivery, clothes or other discretionary purchases. “The problem isn’t the first BNPL purchase, it’s that they keep adding up,” says Derik Farrar, head of everyday borrowing at U.S. Bank.You also need to pay attention to the fine print. In some cases, “no interest” offers come with a catch. For example, if the balance isn’t paid off in time, borrowers may owe substantial penalties or retroactive interest. 401(k) LoansIf you have a workplace retirement plan, there’s a good chance it allows you to borrow from your balance. Roughly 79 percent of 401(k) plans offer loans, according to research from John Hancock. If your plan is among them, your employer determines how much employees can borrow through the program rules, up to the IRS limit of 50 percent of your vested account balance (the amount you could keep after leaving the job) or $50,000, whichever is lower. You must repay the loan within five years.Unlike many other types of borrowing, getting a loan through your 401(k) doesn’t require a credit check. The interest rate depends on the plan, but typically, it’s the prime rate plus one or two percentage points. Recently, that equaled 7.75 percent to 8.75 percent. While those features might make a 401(k) loan sound like an appealing route to take if you need cash, there is a substantial downside: The money you borrow is also out of the stock market until it’s repaid.“People focus on the interest rate, but there’s much more to the story,” says Hadley, the Cleveland wealth adviser. “You’re missing out on any potential growth during that time.” Considering the S&P 500’s average return over the past 30 years is about 10 percent per year, that’s an additional opportunity cost of borrowing on top of interest.There’s also an added risk if your job situation changes. If you leave your employer, the loan typically needs to be repaid within a short time frame—about 90 days, depending on the plan. If it isn’t, the remaining outstanding balance is treated as a withdrawal, triggering income taxes on the unpaid amount plus a 10 percent early-withdrawal penalty if you are younger than 59½.Because of these risks, 401(k) loans are typically best used only if more-favorable options aren’t available to you—say, because you can’t qualify for other loans.©2026 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.