For many Americans, the luxury of having an emergency fund is just that: a luxury. While most financial planners advise having six months’ worth of expenses locked up somewhere, the ugly truth is that most Americans aren’t even close to that level of savings. The Federal Reserve Board recently reported, in fact, that 47 percent of respondents would have trouble coming up with $400 for an emergency.
For those who find themselves in that demographic, when an emergency arises and you need that $400 — to fix your car so you can get to work, to pay a doctor’s bill, or to call a plumber to stop the water from flooding your kitchen — there are options. None of them are terribly good options, but there are several palatable short-term choices.
You must approach this carefully, because if you don’t pay this loan back on time, you can seriously damage the relationship.
The first thing to realize is that you’ll need to swallow your pride a little; you have to borrow money from someone. It’s OK — it happens from time to time. Millions of Americans are in the same position.
The best places to try, in terms of cost, are either your employer or a family member. Asking your employer for an advance may be embarrassing, but if you have a solid relationship in place, it may be a quick and painless solution. The employer will deduct a pay advance from your next paycheck, so you won’t risk the relationship for default.
The matter is slightly more complex with family. You must approach this carefully, because if you don’t pay it back on time, you can seriously damage that relationship.
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Everyone’s family is different. Some are generous, and some are not. However, asking for a loan and enough time to repay it, with a little interest as a kicker, and — this is key — insisting on a promissory note yourself, will be the best solution. This shows your kin you’re serious about paying them back.
The next cheapest option is with a credit card, if you have one. Most cards will have interest rates that run anywhere from 8.99 percent to 23.99 percent. If you are able to pay off that $400 quickly, the cost will be negligible. Even if it takes you a year and you have a rate on the higher end, you will still do better than most other choices.
Beyond this, things start to get expensive — but that’s the nature of the beast with short-term, unsecured credit. You’ll need to do some research. Your local credit union may offer some form of loan that will top out at 36 percent APR (annual percentage rate).
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A number of online installment lenders offer loans, although many of these usually have a $1,000 loan minimum and payments over two or three years, with APRs exceeding 200 percent. The key here is to draw down the minimum loan for the lowest possible rate that the lender has, and make sure there are no prepayment penalties.
Then, immediately pay back all but the money you need for your emergency. While the interest will be expensive on that remaining balance, do your best to pay it down as quickly as possible.
The best advice is to slowly build up an emergency fund so you aren’t left wanting on a day when trouble arrives.
A payday loan isn’t a great option, but it may suit your need. For about $15 per $100 borrowed, you can get that $400 today from a lender, and repay it with about $60 interest when you get your next paycheck. The key here is to plan ahead to pay that loan off on your payday. If you don’t, you’ll get hit with another set of fees in most states.
Even if you can’t pay it all off, then pay off what you can so your outstanding balance is lower and the fees you pay are lower as well.
There is one other “oddball” option, but it can be very helpful: Pawn something. You’d be amazed at the things your local pawn shop will accept as loan collateral. Everything from tools to musical instruments and beyond is fair game, and the pawn shop will know how to value the item. You’ll get a loan for about 70 percent of the item’s value, and anywhere from 30 to 120 days to redeem the loan before you forfeit the item.
Being short of cash is never fun, and it can be a blow to one’s pride. Options exist for short-term credit, but the best advice is to slowly build up that emergency fund so you aren’t left wanting on the day when trouble arrives.
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