Need Cash Fast? How to Pick the Best Loan
The Best Options for a Loan
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.