Research Your Options Before Borrowing Money

Thu, 13 Sep 2012

Have you ever found yourself short of cash? Unexpected emergencies, occurrences and expenses can really put a crimp in your financial health. Whether it is an illness or a disaster, anyone can find themselves in need of an emergency loan. Planning for the future can help with more than just your retirement; it can also lessen the pinch of sudden expenses. It is important to research and consider your options, even when you are in a pinch.  


Non-Loan Options

When you’re in a pinch, some people tend to make rash decisions. Here are some options to think about without having to take out a loan.  


There are ways to prepare for unexpected losses or costs. The most common is insurance. Liability and property insurance can protect you from medical bills and the cost of replacing your vehicle or other possessions. Review your insurance policy with your agent at each renewal to be sure your coverage is appropriate. Consider purchasing optional coverage such as medical payments on auto claims or replacement cost coverage for either your home or car.  


Savings or CD’s

A savings account or a CD with early withdrawal options are good choices for “rainy day funds” because they earn interest. It is recommended to have a minimum of six months of living expenses readily available in some type of savings account. A savings account can also be used as overdraft protection for your checking account. Keep in mind that, while you may earn more interest with a CD, you can lose some savings to an early withdrawal penalty if the CD does not have liquidity options. Your banker can tell you more about CD products that allow for withdrawals within certain amount and time-frame parameters.  


Credit Cards

Another option is to maintain a credit card account with a low or no balance to be used in case of emergency. To minimize costs, look for a credit card that has no annual fee and a competitive interest rate. Ideally you would use the card for emergencies such as car repairs, not groceries or take-out.  


If You Need to Borrow

Understanding that not everyone has the access, available credit or funds to prepare ahead for unexpected expenses, there are other options available. Each individual would need to decide what the best option is for their situation.  

Borrowing from your 401K or IRA

While I would encourage you to leave your retirement savings out of the equation completely, there are ways to access it if you really need it. Most plans allow for borrowing from the 401K or taking a hardship withdrawal. Note that there are fees and penalties involved in this type of emergency borrowing and you will reduce your retirement savings if you make just the withdrawal.   In both cases you will be responsible for a penalty if you are younger than 59 ½, and you will be taxed on the amount as income. Of these two options, the 401K loan may be the better one because you pay it back through payroll deduction and in essence are paying yourself back with interest. Some IRA plans will allow early withdrawals with similar penalties. Each retirement plan will have different fees and rules associated with borrowing and withdrawing so you will first need to check with your employer or plan administrator.  

Personal Loans

If you need to borrow a large amount, and you have a few days for processing, check with your bank to see what they offer for personal loans.  Applying for a secured or unsecured personal loan will most likely involve a credit check and possibly an application fee. When making your borrowing decisions, always add up the cost, including. processing fees and interest rates. If you are paying too much for borrowing your emergency expenditure can turn into a long term cycle of extra debt.  Have you ever had to come up with money quickly and unexpectedly? How did you do it?