A financial emergency can strike at any time, and you may suddenly find that you need an abundance of cash — fast. Unfortunately, not everyone is able to get through these situations without borrowing money.
Tens of thousands Americans are living paycheck to paycheck. According to a recent consumer expectations survey by the New York Federal Reserve, one in three Americans say they wouldn’t be able to come up with $2,000 within a month to cover an unexpected expense.
If you don’t have an emergency fund, what do you do when you get hit by an unexpected medical bill or your car breaks down? We give you options for finding money quickly if you need it right away, and options if you can afford to wait.
When you need money in 1 or 2 days
If you don’t need cash, your credit card could be a way for you to handle an emergency almost instantly. As expensive as credit cards are, the APRs are generally not going to be too much higher than 30%.
“It’s not ideal,” Chris Dlugozima, a financial wellness expert at GreenPath, a nonprofit debt and consumer credit counseling service that operating in all 50 states. “But if it comes down to a credit card or a payday loan that’s charging 500% interest, it’s sort of the lesser of two evils.”
A credit card can be a quick fix for a one-off emergency. However, if you routinely fall behind on bills, you should consider turning to your credit card with caution. The double-digit interest rate will quickly increase the amount you owe if you’re not able to pay the balance off in full on time.
It allows card holders to access funds quickly.
High APRs, averaged at 16%.
There may be flexibility if you struggle with credit card debt. For instance, you could try to work out a repayment plan with your credit card company.
Your debt can quickly snowball if you keep getting into credit card debt for emergencies.
APRs are lower than those of credit card cash advances.
Credit card cash advances
In a time-sensitive situation, a credit card advance allows you to borrow cash against your line of credit. You request the money at an ATM with your credit card and a cash advance PIN, in person at a bank, or with convenience checks you make out to yourself and cash.
While they are relatively easy to obtain in emergencies, cash advances typically have higher APRs than regular purchases and they carry fees (3% to 5% of the money borrowed). Unlike a regular purchase, where interest doesn’t start to hit unless you don’t pay the balance, interest starts accruing right away when you advance money.
It can be a costly way to borrow money, but if you think a cash advance is the best option for you, make sure you pay the advance off as quickly as possible.
It allows card holders to access cash quickly.
Higher APRs than normal— usually up to 30%+.
There is a service fee and possibly an ATM fee.
Your cash advance credit limit may be different than your credit limit for purchases. For example, a bank may give you a total credit limit of $5,000 but limit you to using $2,500 of it for a cash advance.
If you have relatively good credit and a good relationship with a bank, you can try to get a signature loan or a personal loan in an emergency. Your local community bank, credit union, or a major retail bank might be willing to work with you in this situation.
A signature loan is an unsecured form of borrowing, and its interest rates range from 8% to 15%, depending on your credit and the relationship you have with the bank. It usually has shorter terms than other personal loans, ranging from just a few months to 4 to 5 years, on average.
The application and approval process can be quicker because it’s a shorter-term, less risky loan. To apply, you must submit qualifying financial documents, including proof of income and employment.
The underwriting process can be quick.
APRs are higher than collateral-based loans.
They carry lower APRs than credit cards.
There’s a lack of flexibility after you take out a loan if the emergency is on-going and you need to borrow more.
You will know how much to budget for debt repayment every month.
Payday loans and auto title loans
Payday and auto title loans are high-cost loans that can be obtained easily and quickly from storefront or online lenders. Consumer and financial experts strongly recommend borrowers steer clear of such loans because they are designed to profit based on borrower’s inability to repay.
Payday loans are small-dollar personal loans that become due in a lump sum on your next payday. A typical two-week payday loan with a $15-per-$100 financing fee translates to an annual percentage rate of almost 400%. In comparison, the benchmark APR for affordable small loans is 36%. If you can’t repay on the next payday, you can roll over your debt and incur another $15 fee — that’s when a debt trap begins.
Of the 2,900 payday loan complaints received by the Consumer Financial Protection Bureau in 2017, 30% were about unexpected fees and 15% on their unaffordability.
A title loan is a secured loan, and you have to put up your car as a collateral to get it. Title lenders charge an average of 25% as a monthly financing fee, which adds up to an APR of at least 300%, according to the FTC. If you can’t repay the loan at all, you risk losing your car.
“You should try everything else,” said Juan Guevara, a certified financial planner based in Colorado. “And if there’s absolutely no other way to do anything, think about those shorter term loans.”
If these risky loans are your last resort to cover an emergency, be sure to pay off the debt in the shortest term possible to avoid getting caught in a debt trap or losing your car.
The underwriting is both weak and quick.
They are extremely expensive loans with triple-digit APRs.
Borrowers may risk getting caught in a debt trap if they can’t repay payday loans.
Borrowers may lose their cars if they can’t pay off the debt.
Negotiate with your creditor
When you are in a financial emergency, the first step is to try to negotiate with your creditor before borrowing money. Before a bill comes due, talk to your creditors and explain the circumstance. If you need a few more days to come up with the money, they’re way more likely to work with you then you might realize. Many utility companies and hospitals offer lower interest — even 0% — payment plans to make sure that you can pay past due balances over the course of several months.
Ask for help from friends and family
If the negotiation doesn’t work out, ask your family or friends and see if they can loan you money before turning to risky, expensive loans.
“There might not be an interest rate attached to that but you also got to be careful that you could be damaging a relationship there if you don’t end up paying [the debt] back,” Guevara said.
When you need money in 1 or 2 weeks
“Payday alternative” loans from credit unions
If you have a little bit more wiggle room, plenty of community banks and credit unions offer small-dollar loans with much lower interest rates than payday or title loans. These types of financial institutions are much better regulated than high-cost lenders.
For example, all federal credit union loans have an 18% interest cap, with one exception — Payday Alternative Loans, which have interest rates capped at 28%.
“Payday alternative” loans
They are safer loans compared to unaffordable payday lending.
They carry fairly high APRs.
The loan term is short, ranging from one to six months.
It takes a while to obtain the loan. Borrowers must be members of the federal credit union for at least one month.
The loan amount is small, typically up to $1,000.
Personal loans offer perhaps the greatest flexibility when an emergency strikes. You can borrow money at a fixed interest rate over a fixed amount of time, then you pay a fixed monthly payment until your loan is paid off.
The process to apply for a personal loan is similar to applying for a credit card or auto loan: The lender will run your credit and offer you a certain rate based on your creditworthiness. Besides your credit score, you’ll need to prove that you have the ability to repay your loan, usually with pay stubs or other evidence of employment.
A personal loan is a form of unsecured borrowing, which means its interest rates are generally higher than secured loans, such as a mortgage. The higher your credit score, the lower rate you may qualify for. Nationally, a personal loan with a 24-month loan term carries an average 10.31% interest rate. You can apply for a personal loan from banks and online lenders. Use our table below to compare personal loan options to find the best option!
Minimum 500 FICO
Minimum Credit Score
24 to 60
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There are a variety of loan amounts and terms to choose from.
APRs can be high if your credit is not great.
You know exactly how much you will ultimately pay in interest.
If you have a situation where you don't know exactly how much cash you're going to need, a personal loan can be limiting since you must apply for a set amount of money.
You request a certain amount of money to cover an emergency, and so there's no temptation to borrow additional funds later.
Credit cards with 0% intro APR
If your credit score is good, apply for an introductory 0% interest credit card. Balance Transfer credit cards let you wait as long as 21 months to pay off your balance without accruing interest.
A balance transfer card is a solid option for those with a tall stack of credit card debt. It allows users to move debt from a high-interest credit card to a card with a promotional 0% APR period (not through same card issuer). As a result, you could pay less in interest than you would if you kept the debt where it is. But if you can’t repay your debt before the promo period ends, the credit card company may retroactively charge you all the interest that they would’ve charged during the intro period.
Credit cards with 0% intro APR
You can borrow money for 0% interest for a period of time.
If you can’t repay your balance within the 0% interest period, you may be hit with all the interest you would have accrued during the intro period — known as deferred interest.
Some cards charge $0 intro balance transfer fees, allowing you to cut costs.
You don’t know exactly how much money you will ultimately pay in interest.
The new card may offer a sign-up bonus and/or long-term perks, although this may not be a concern when you are in an emergency.
You need a good or excellent credit score to qualify for the best offers (generally 700 and up).
If you are in an ongoing financial tragedy, a credit card gives you flexibility in terms of the amount of money you can borrow.
In most cases, you have to pay a balance transfer fee — typically 3% of your total transfer amount.
A 401(k) loan allows you to borrow up to $50,000 or half of the total amount of money in your account, whichever is less. Most 401(k) plans offer such loans.
The funds are taken directly out of your 401(k) account balance and a repayment plan is created based on the amount you borrowed and the interest rate you agreed to. When you make payments, the money goes back into your 401(k) account, typically through an automatic payroll deduction. The maximum loan term is usually five years, and you’ll need to make payments at least quarterly.
If you fail to repay the loan on deadline, the money withdrawn is counted as taxable income and the IRS will charge you a 10% early withdrawal penalty if you are under age 59½.
You can get money relatively quickly without any credit check because you are essentially borrowing from yourself.
If you default on the loan, the money you borrowed will be taxed and hit with a 10% penalty unless you’re already age 59½ or meet other special criteria.
You have a long time to repay the loan.
The money you borrowed is not participating in the market and you may lose out on compound interest. It affects your portfolio performance over time.
The interest you pay back to the account is money put back in your retirement fund.
Asking your employer for help
While it’s not common, some employers may offer paycheck advances or financial help in other ways to help you get through an emergency. For instance, some employers have an Employee Assistance Program (EAP), which are designed to help resolve problems workers encounter in their life, financial and personal alike.
If your company doesn’t have an EAP, you can still ask if they can provide some type of loan or even give you a raise if you’ve been doing a good job, Guevara suggested. Even if they decline your request, it doesn’t hurt to ask.
Negotiate your charges
As we discussed earlier, negotiating is probably one of the best tools you have when an emergency arises. Explain your situation to your creditor and they may work out a payment plan with you or simply extend your due date, depending on the specific situation.
When you need money in 1 or 2 months
Home equity loans or HELOC
When you have time on your side, you may leverage the equity in your home to cover short-term emergency needs. You can take the time time to shop around with different lenders for a home equity loan or a home equity line of credit (HELOC). Both loans are secured by your house.
A home equity loan is a fixed-rate installment loan. The borrower gets a one-time lump sum. It’s repaid in equal monthly payments over a fixed period of time — usually in 10, 15, 20 or 30 years. It’s the second mortgage on your house.
A HELOC, on the other hand, is a revolving credit line. How much you can take out will depend on your home’s value, your remaining mortgage balance, your household income and your credit score. HELOCs typically have variable interest rates, so it’s important when you’re applying for a HELOC to understand exactly how much can the interest rate go up.
You can apply for a HELOC and leave it open, allowing you to draw funds from it as needed; it can stay open for up to 10 years. As you pay off the principal, your credit gets replenished and you can use it again. You only pay interest during this time period. After the line expires, you enter the repayment period, when you’ll repay the remaining balance as well as any interest owed, if there is any.
Some financial planners advise their clients to open HELOCs even they are not planning to use them, just in case something comes up in the future. Most lenders will let you borrow up to 85% of your home value, minus your outstanding debt.
The appraisal and underwriting process for both loans takes one to two months. Qualifications vary, but most lenders will check your credit and debt-to-income ratio. You should expect to pay closing costs and other fees upfront, which range from $500 to $2,000.
Interest rates on both loans are not that different from a regular mortgage rate, which is lower than other unsecured loans.
Home equity loans or HELOCs
Both have significantly lower APRs compared to other unsecured borrowing options, such as credit cards or personal loans.
You have to make monthly payments and you don't have a 0% interest promo period.
You have a long time to repay the loan and the monthly payments are usually quite small.
Both types of loans almost always have closing costs and other fees.
With a home equity loan, your monthly payment is predictable because your interest rate will be fixed.
If you take out a HELOC with a variable rate, your monthly payments may change.
You can withdraw funds as needed with a HELOC.
Defaulting on either loan could result in a foreclosure.
Sell some assets
If you have one or two months to come up with funds, you may want to see if you can generate some income by selling some of your assets, either doing a yard sale or selling your possessions on eBay.
A key takeaway
When emergencies arise and you don’t have rainy day cash, don’t panic — you should first and foremost try the cost-free ways to bridge a financial shortfall. If you can’t borrow money from friends and family or work out a payment plan with your creditor, then consider the least expensive loan that comes with the lowest level of risk after determining how much money you need and how much time you have to come up with the funds. Don’t focus just on the monthly payment, but the interest rate and the loan term as well.
After recovering from this current financial emergency, start planning for the next one. Life will inevitably throw a curveball at you again, be it unexpected job loss or an astronomical hospital bill. If you start putting money away now, you will have the money to deal with the next financial setback.
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