Emergency Funding Options: What You Need to Know

It happens to a lot of us. You’re a little short on cash to cover the rent. You suddenly need a few hundred dollars to pay for a car repair. It’s certainly nothing to be ashamed of: At the end of 2022, nearly two-thirds (64%) of U.S. consumers reported they were living paycheck to paycheck, according to a LendingClub survey.

Fortunately, emergency lending options are available if you’re running low on money and need funds right away. These include personal loans, credit card cash advances, and credit card purchases. One word of caution: Try to avoid high-interest payday and car title loans when you’re scraping together some quick cash.

Personal Loan

Personal loans, offered by banks, credit unions, and online lenders, enable borrowers to obtain a certain amount of money for almost any purpose. A personal loan is an unsecured loan, meaning it’s not backed by collateral. To repay a personal loan, you make fixed monthly payments (including interest charges) until it’s paid off.

Here’s an example: You might take out a $5,000 personal loan with a 36-month payoff period and a 12% annual percentage rate (APR). Under this scenario, your monthly payment may be around $166 and you’ll pay about $980 in interest.

Generally, it takes one to five business days to receive money from a personal loan once your application has been approved, but there are some options for quick financing.

Pros of Personal Loans

• Lower interest rates: Interest rates for personal loans are typically lower than for credit cards. In November 2022, the typical interest rate for a 24-month personal loan was 11.21%, while the typical rate for a credit card charging interest was 20.4%, according to the Federal Reserve.
• Fixed interest rates: Most personal loans charge fixed interest rates, meaning they don’t change during the time you have the loan.
• Potentially high limits: Your borrowing ability might range from a few thousand dollars to $100,000, depending on your income and credit history.
• Build credit: Making timely payments on a personal loan can help build your credit.

Cons of Personal Loans

• Adds to debt: Taking out a personal loan adds to your debt.
• Potential fees and penalties: Some lenders charge borrowers fees and penalties, such as late payment fees or prepayment penalties.
• Higher interest than other loans: APRs for personal loans might be higher than rates for other types of loans, such as home equity loans, since they are not backed by collateral.
• Possible credit damage: Making late payments on a personal loan or missing payments altogether might hurt your credit.

Credit Card Cash Advance

A credit card cash advance is essentially a short-term loan from a credit card issuer. The borrowing limit for a cash advance typically is lower than the total borrowing limit for your card. For example, you may have an overall credit limit of $5,000, but the cash advance limit might be $1,500.

If you borrow money using a credit card cash advance, the amount is added to the overall balance on your card. And until the cash advance is paid off, you’re charged interest. The cash advance APR is generally higher than the APR for purchases.

Pros of a Credit Card Cash Advance

• Quick cash: You can gain quick access to cash by visiting a financial institution, going to an ATM, using the card issuer’s website or mobile app, or writing what’s known as a convenience check.
• No credit application: You don’t need to apply for a cash advance, as the amount you’re able to borrow is already part of your overall credit limit.
• Doesn’t require collateral: No collateral is required.
• Potentially more manageable to repay: The credit limit for a cash advance is smaller than your overall credit limit, meaning you might be taking on a manageable amount of debt.

Cons of a Credit Card Cash Advance

• Added debt: A cash advance adds to your debt.
• Higher interest rate: The APR for a credit card cash advance might be considerably higher than the APR for a credit card purchase.
• Added fees: Card issuers typically charge a cash advance fee. For instance, you might wind up paying a fee that’s 5% of the amount you’re borrowing.
• Interest charged immediately: Interest charges usually start the day you get a cash advance. That differs from a normal credit card purchase. When you make a purchase, the card issuer generally provides a grace period for interest. During this period, you can pay off the balance before interest charges kick in.

Credit Card

Depending on the situation, using a credit card to cover a big expense might be a good option.

For instance, let’s say your refrigerator died and you need to buy a new one. If you don’t have enough cash on hand to pay for a new $2,000 refrigerator, you might choose to rely on a credit card for the purchase.

Pros of a Credit Card

• Potential intro interest rate: Some credit cards may offer an introductory 0% APR period, such as 12 or 18 months, when you make a big purchase.
• Possible rewards: You might earn rewards, such as cash back, as a result of making a purchase.
• Manageable repayment options: You can spread out payments over a period that aligns with your budget.
• Build credit: On-time payments on a credit card can help boost your credit.

Cons of a Credit Card

• Adding to debt: You’re taking on more debt.
• Increased credit utilization rate: Making a purchase on a credit card might bump up the amount of available credit you’re using, which then might cause your credit score to drop.
• High interest charges: If you’re unable to score a 0% APR offer or pay off the balance before interest charges hit your account, you may be stuck with a hefty tab for interest.
• Variable interest rate: Credit card interest rates often fluctuate, making it more difficult to budget for monthly credit card payments.

Borrowing From Friends and Family

If you’re in a bind, you may be able to borrow cash from friends or relatives.

But don’t ask just anyone in your circle. Pinpoint those who are financially stable enough to lend help. In addition, you might not want to approach friends or family with whom you have a rocky relationship.

Before going to a friend or relative for financial assistance, be sure you’ve exhausted all of your other options. Come up with a reasonable amount of money to seek. You don’t want to wind up coming back for more money, but you also don’t want to come off as greedy.

If a friend or relative agrees to give you money, be clear about whether it’s a gift or a loan. If it’s a loan, create a contract that spells out:

• The amount being borrowed
• The interest rate or collateral (if any)
• The number of loan payments
• The amount of each loan payment
• The payoff schedule
• The consequences of not paying off the loan

Once the contract is in place and you have the money, treat this loan as you would any other bill: Include it in your budget, and make on-time payments.

Pros of Borrowing From Family and Friends

• No approval process: When you borrow money from family and friends, you don’t need to fill out an application and wait for approval, as you would with a lender or credit card issuer.
• Reasonable interest rate: The friend or relative who’s lending money to you might not charge any interest, or the interest rate might be below what a lender or credit card issuer would charge.
• Flexibility: A friend or relative may be willing to give you a break—pausing monthly payments, for instance—if you run into a temporary financial obstacle.
• Quick access to cash: Chances are that you’ll be able to get the money pretty quickly, perhaps faster than you would with a lender.

Cons of Borrowing From Family and Friends

• Discomfort: A lending relationship between you and a friend or relative could be awkward.
• Strained relationship: If you fail to keep up your end of the deal—by falling behind on payments or not paying off the entire loan, for instance—your relationship with the friend or relative who lent money to you may be damaged or destroyed.
• More debt: A loan from a friend or relative could complicate your finances by adding another bill to your pile.
• Lack of credit reporting: Since the friend or relative won’t be reporting your loan payments to any of the major credit bureaus (Experian, TransUnion, and Equifax), on-time payments won’t benefit your credit history.

Tips for Avoiding the Need for Emergency Funding

If you need some quick cash, it’s best to avoid short-term lending options such as payday loans and car title loans. Why? Because they’re expensive.

A typical two-week payday loan comes with an APR close to 400%, while a car title loan usually charges an APR around 300%.

Aside from steering clear of risky loans, here are four tips for keeping your finances in good shape:

Create a Budget

Setting up a budget offers the ability to track your income and expenses. This makes it easier to adjust spending as needed and to put money aside to achieve short-term and long-term financial goals.

Reduce Spending

Cutting expenses can help free up cash that you might need in a pinch. For instance, you might review your subscriptions and memberships to see which ones you can do without, or you might slash your dining-out and entertainment spending.

Create an Emergency Fund

Establishing an emergency fund might prevent you from taking on more debt to cover expenses like car repairs or unexpected medical bills. Generally, experts suggest building an emergency fund that contains enough money to cover three to six months’ worth of everyday expenses.

Pay Off Debt

Decreasing your debt can give you more financial freedom in case the need for emergency cash arises.

The Bottom Line

It can be nerve-racking to face a cash crunch, particularly if you need money right away. Keep in mind, though, that each option for filling in the gaps comes with advantages and disadvantages. To avoid getting yourself into deeper financial trouble, avoid high-interest payday and car title loans. And do things like creating a budget and cutting back on spending so you stand a better chance of dodging a cash shortage in the first place.

If you decide to take out a personal loan, use O1ne Mortgage’s free comparison tool to find the right deal based on your credit profile. For any mortgage service needs, call us at 213-732-3074. We’re here to help you navigate your financial journey with ease and confidence.