SPECIAL OFFER: - Limited Time Only!
(The ad below will not display on your printed page)
Sometime you just find yourself in a cash crisis. Maybe you're having an emergency root canal, maybe a pipe bursts and floods your kitchen. In the best-case scenario, you have savings set aside for just such a catastrophe -- but if you don't, you may have to borrow the money.
"When you need cash quickly, there are savvy ways you can get it," says Gerri Detweiler, author of Slash Your Debt. "But there are also bad -- and ugly -- choices" The tough part is telling them apart. Read on for the surprising truth.Best Options
Home equity lines of credit. One of the best choices is to borrow against the value of your home. At press time, interest rates on home equity lines of credit average 8 percent. Although significantly higher than they were one year ago, these rates are still far lower than rates for almost any other source of quick funding.
Typically, if you have a home equity line of credit, you can get a loan within 24 hours. Because these loans are initially structured as interest-only, minimum monthly payments tend to be very low. If you borrowed $1,000 at 8 percent, you'd only owe $6.67 a month in interest (though eventually you would need to pay back the $1,000 principal, too). There is a prepayment option, and for $31 a month you could pay off the $1,000 loan with interest in three years; for $87 you could pay it off in one year. Best of all, the interest payments may be deductible, depending on your particular tax situation.
To take advantage of home equity credit, you of course need to own your home. If you're unemployed or piling up debt, your application for a line of credit may be rejected by a lender, so it's wise to open your line before you need it. Having that borrowing power available actually helps your credit rating. One caveat: Don't forget that the collateral in a home equity loan is, in fact, your house. True, home equity lenders are unlikely to snatch your house for a single late payment. But though foreclosures are rare (they happen in far less than 1 percent of home equity loans), it's not worth putting your home at risk for anything less than an emergency.
Loans from family. Borrowing from relatives or friends can make sense. It's hard to imagine you'd get better terms anywhere else: Hardly anyone is going to ask for more than 10 percent and some won't accept interest at all. But beware: Your loan may come with emotional baggage -- and may create more by exacerbating a sibling rivalry, for example, or making you feel dependent on your parents.
To keep such problems at bay, experts urge you to put everything in writing. Simple promissory note forms are available at office supply stores and online sites such as www.nolo.com. Using one of these forms will force you to clarify the loan's terms -- whether penalties will be exacted for late payments, for instance -- and will prevent both parties from growing vague about what their obligations are. "Friend and family loans tend to cause strife when people remember the terms differently," says Michael Kresh, a certified financial planner at M.D. Kresh Financial Services, in Islandia, New York. "So get it in writing!" By the same token, pay with checks or money orders rather than cash so that there's a record of each and every transaction.
Credit cards. Surprisingly, your credit cards may actually be a good source of ready cash. People tend to overlook this option because the terms look downright frightening. On a credit card cash advance, the average interest rate is currently 17.7 percent, and there's often a onetime processing fee (typically 3 percent of the amount borrowed). If you don't pay back the loan quickly, it can get very expensive very fast.
But if you're careful, a credit card cash advance can prove to be an unexpectedly good option. For one thing, it allows you to get your money immediately. There are no forms to fill out and often it's as easy as going to an ATM. And if you borrow $500 and pay it back within a month, the total cost of the loan will be just $22.38, including the transaction fee. But if you wait a year to pay the money back, the cost of the loan balloons to $565.80.
Charging an expense, when possible, rather than paying it off with a cash advance can be an even better option. On any new charges, most credit cards offer a one-month grace period. If -- and only if -- you can pay off the card within that time frame, you'll have managed an interest-free loan.
Personal bank loans. It may seem surprising, but this standby is definitely a dud. You won't get your money quickly: You'll fill out forms galore and undergo plenty of scrutiny, and the approval process may drag out for several weeks. After all that, you won't get great terms, either. At press time, the average interest rate on a personal bank loan is 14.8 percent. That's actually higher than the average rate on a credit card purchase: 14.2 percent.
Payday loans. Perhaps you've driven by a brightly lit storefront advertising one of these services and wondered whether it would be a good option in a quick-cash crisis. Don't even think about it! These loans should be avoided at all costs, literally.
Payday lenders offer to float you some cash until your next paycheck. You simply write them a check postdated two weeks hence, or whenever your next salary payment comes in. They charge a fee, typically $15 for every $100 they loan. If you borrow $500, that means a $75 fee. That translates into an annual percentage rate (APR) of 390 percent -- and it rarely stops there. When payday arrives and the loan comes due, borrowers who don't have the $575 will have their loans rolled over, but with an additional 15 percent fee, bringing the total to $661. In a year, the APR could hit four digits. "Payday loans are a complete rip-off," says Scott Bilker, founder of DebtSmart.com.
Title loans. In these shady deals, not even legal in some states, a company lends you money in exchange for the title to your car. Borrowers are usually asked to hand over a set of car keys and typically receive no more than a third of the car's value. As for fees, it's standard for title lenders to charge $25 for every $100 borrowed. Most title loans are due in a month, but as with a payday loan, lenders try to keep rolling them over -- and charging you. Miss a payment date and your car can be sold at auction.
Originally published in Ladies' Home Journal, August 2006.