The smartest (and dumbest) ways to borrow money

BDO Money Matters

By Mark B. Aragona for Yahoo! Southeast Asia

Sometimes when things are tight and you find yourself needing a loan, it’s tempting to grab the closest source of credit you can find. Your credit card, for example, is an easy way to borrow, but can be a double-edged sword if you end up defaulting on payments and getting bad credit history. Thankfully, you do have alternatives—some you probably haven’t even considered before:

Borrow from your mortgage. This works if you’ve been paying for your home for some years and your home’s accumulated some value. You can unlock that value by borrowing back what you paid, essentially another loan secured by your house. Just be sure you can pay it all back, or you may end up without a roof on your head.

Use your life insurance policy. Under the impression that life insurance is only useful when you die? The cash value of your policy can be a quick source of funds. How much depends on the type of policy you have and how long you’ve been paying for it. Traditional types of policies allow you to obtain loan that’s secured by the cash value, but variable types don’t require you to return the cash since it’s considered an investment.

Use a credit line.
Got a cash investment like stocks, bonds, mutual funds, or a similarly liquid asset? Use it as collateral for a credit line at a bank—that way you get a loan without having to touch your asset. This comes in handy in case of emergencies or to buy additional investments.

Borrow from SSS, GSIS, or Pag-ibig. If you’re an employee, these are mandatory benefits. You might even have been paying their dues for years without knowing you can take advantage of their low interest rates.

Borrow from your company retirement program.
If your company has one set up, this is another way of getting easy credit. Just watch the late fees, and know that the loan may become due and demandable should you decide to leave your job.

But for every smart way to get a loan, there’s a dumb way as well. Here are some credit no-nos you should avoid:

Borrowing from loan sharks.

Even if desperate, you ought to think twice before getting into the water with these folks. At usurious rates of 20%-30% and just days to pay up, you’ll be opening yourself up to a great deal of stress and sometimes even risk to your own life. Do yourself a favor and stay away.

Borrowing from pawnshops. Pawnshops offer loans in exchange for something you own. A common sight in our country, they’re generally a bad idea. Pawnshops charge exorbitant rates while only giving a fraction of your collateral’s worth.

Cash advance on your credit card. By slipping your credit card into an ATM you can tap a portion of your credit for some much-needed cash. However, you can get slapped with flat fees right from the start, and the high interest rates start ticking the moment you get that money in your hands until you pay it all.

Borrowing from too many sources can leave you bewildered, stressed-out, and owing much more on interest than you would have, simply because you forgot you owed someone money. As much as possible, borrow from a single source with low-interest.

And lastly, the Filipino favorite…

Borrowing from family and/or friends. The terms may seem good. You may not even have to pay interest. But failing to live up to your agreements can damage a relationship, sometimes for good. And while you can always make more money, you can’t always win back the trust of a friend or a sibling. The more that relationship matters, the more wary you should be of asking for a loan.

Ultimately, how “smart” you are at borrowing is determined by how well you handle the money once you get it. Borrow in order to buy additional investments, shift outstanding debts with high rates to those with low rates, or to pay for important and immediate expenses. Anything beyond these is courting trouble.