The Federal Reserve’s 0.75-percentage-point rate increase has made it more expensive for consumers to borrow money for everything from homes to refrigerators. Yet inflation has made it even more difficult for consumers to maintain their lifestyles.
The lower purchasing power of the dollar has meant people are buying less than what they usually have, with most switching to cheaper alternatives to get value for their money.
As such, consumers are faced with two unpleasant alternatives: borrow at high-interest rates, or manage their expenses with money that is fast losing value.
Given the scenario, there is certainly a need for extra cash right now, especially as the economy has technically slid into recession. Here are some viable options people can use to raise cash while avoiding high-interest rates.
Many 401(k) plans allow you to borrow $50,000 or up to 50% of the funds vested in your account, whichever is less.
The cheering news is that interest rates on 401(k) loans are usually lower than those on credit cards or personal loans.
Also, since you are borrowing from yourself, the majority of the interest you pay just flows back into your account. Additionally, borrowers will have more leeway in their repayment schedules and won't need to provide any upfront security.
However, 401(k) loans come with some disadvantages. Firstly, you are reducing your retirement contributions, which could be dicey considering that upon retirement your chances of earning income from paid work are reduced.
Many who borrow from retirement accounts also reduce their continuing contributions, compounding the impact. This makes it even harder to make up for the money lost.
Tapping retirement accounts is more advisable for younger people. This is because they have the capacity to continue making contributions to their 401(k)s given that they have more time to spend in the labor market than older people (50 years) older that have limited time.
Both loans allow homeowners to borrow against their home equity - the difference between your home’s value and your mortgage balance. The interest rates are typically lower than other loans.
The home-equity loan comes as a one-time lump sum at a fixed rate. As such, they aren't suitable for borrowers that need a small infusion of cash. HELOCs on the other hand are a bit different. They are a revolving source of funds, much like a credit card, that you can access as you choose.
However, there are also downsides to tapping into your home equity. There are chances that you could lose your home since you are borrowing against it. This is the fate that befell people in the 2008 recession.
If you have a balance, then switching to a 0% intro APR credit card may be an option you can explore.
You can still get up to 21 months with no interest on some balance transfers. Not paying interest for almost two years can give you some wriggle room to meet your present needs and get your finances back on track. If you have good credit, you might be able to get 6% over five years.
One demerit of using a card with a 0% introductory offer is that you still have to pay a balance transfer fee. This is typically around 3% of the transferred balance. So if you’re bringing over a large balance, it could be significant.
It can make sense to consider a loan from family or friends if you are fortunate enough to have such an option.
When you’re borrowing from friends or relatives, you can ideally work together to set a much lower interest rate and favorable repayment terms.
For people with poor credit or for people turned down by other lenders, this may be their best, or even only, option.
The Internal Revenue Service sets rates for intra-family loans as a way to prevent people from disguising gifts as loans, and as of July 2022, the rate for a long-term loan is 3.22%, significantly lower than the average mortgage rate, which is 5.54% as of the week of July 21.
The cons are unfortunately equally obvious, as borrowing from friends or family comes with awkwardness, pressure, and, in worst-case scenarios, life-changing consequences.
The Fed would stop at nothing till interest rates fall to its 2% benchmark.
This would mean hiking interest rates to slow the economy and make borrowing costs expensive. Given that inflation is currently at 9.1%, it implies consumers are in for a rough ride till the Fed's target is achieved.
However, inflation, recession, or interest rate hikes do not erode the need for money to fulfill short or long-term obligations.
Many people would resort to borrowing to meet these obligations. Using the alternatives outlined can give you access to funds at a very affordable rate in an environment where benchmark interest rates seem to defy the law of gravity.