When an emergency strikes — you need plane tickets to get to a funeral or your transmission shuts down on the car you need for work — you may find yourself needing some cash fast.
But, if your credit cards are maxed out, where do you turn?
There are several options, but each has strings attached. Take a look at these pros and cons before you decide.
1. Borrowing from your 401(k)
The advantage here is convenience. You can simply call your human resources department at work and sign a few forms to get the money. There’s no credit check. Principal and interest can be deducted from your paycheck, and you get an extended payback period of five years.
Also, the interest rate is low (generally just 1 or 2 percentage points above banks’ prime rate), and the interest you pay goes back into your account.
Disadvantages: If you don’t repay the loan on time, you’ll have to pay taxes on the loaned amount plus a 10 percent penalty if you’re under age 59-and-a-half. Five years may seem like plenty of time — but, if you quit or lose your job, the loan will likely be due in full within 60 days of you leaving the company.
Even if you make payments on time, you’ll be repaying the loan with after-tax money instead of reaping the advantages of contributing to the fund with pre-tax dollars, says Casey Weade, president of Howard Bailey Financial in Ft. Wayne, Ind. That means the money will be doubly taxed because, when the time comes to withdraw the money in retirement, you’ll be taxed again.
A better option may be to take a break from contributing to your 401(k), says Melinda Opperman, senior vice president of community outreach for Springboard Nonprofit Consumer Credit Management in California. Contact your HR department and ask how you can opt out for a few months. You’ll lose momentum in saving, and lose out on any company match for those months, but you won’t have the penalties that come with borrowing.
2. Home equity line of credit (HELOC)
These loans are based on the amount of equity you’ve built up in your home, and they typically require a home appraisal and title search, paperwork and fees to qualify.
Once you’ve got the account, you can take money out repeatedly, and you pay interest only on the amount you spend. If you’re banking online, using this type of account may be as simple as filling in an amount and clicking on “transfer funds” to get the money in seconds.
Unlike with personal loans or credit cards, the interest on your HELOC may be tax deductible.
Plus, “the interest rates are oftentimes better than the interest rates on other types of loans,” says Jana Castanon, community outreach coordinator for Apprisen Financial Advocates in Overland Park, Kan.
Shop around. And be sure to find out whether the loan would give you a lump sum (called a home equity loan) or revolving line of credit; whether there is a prepayment penalty (additional costs for paying the loan off early); whether the interest rate is variable or fixed; and whether there are closing costs or inactivity fees (fees charged if you don’t touch the line of credit for a certain length of time), Castanon says.
Disadvantages: If you have any doubt you can repay the money, don’t let anyone talk you into this kind of loan, Opperman says. That’s because you secure this loan with your home. If you default on your loan, the bank can take your house.
You also have to have equity in your home to get such a loan, a problem for many homeowners who found themselves underwater on their mortgages (owing more than the house is worth) in the housing crisis.
If you do get a line of credit, it can be a standing temptation if you don’t change your spending behavior. The challenge is not to use it like an ATM once you get beyond the immediate emergency, Opperman warns.
3. Payday loans
You won’t need good credit to qualify for a payday loan, Weade says — just proof of employment and a few pay stubs. You can find these services in corner stores and strip malls all over the nation.
Disadvantages: There’s a reason payday loans are so easy, Weade says: They’re for short periods of time, and they come with high fees and penalties. The Center for Responsible Lending reports they typically carry an annual percentage rate of 365 percent based on the typical loan term of 10 days.
Don’t choose this option lightly, Weade says, because you may get trapped in cycles of growing debt you can’t repay. Plus, not repaying payday loans on time can do severe damage to your credit.
4. Pawn shops
This is a convenient way to make a small amount off something sitting around your home. You can sell something outright to a pawn shop, or you can get a loan based on the value of what you’re selling. In that case, you give a pawnbroker an item of value — a ring, for example — and the broker gives you a small loan based on its value. If you pay the loan back in time (usually within 90 days) you get the item back. If you don’t, the broker can sell it to someone else. Taking out this kind of loan doesn’t affect your credit, Weade says, unlike some other forms of borrowing.
Disadvantages: You are sure to get less than the item is worth.
“Prepare to be insulted by the price offered,” Weade says.
There also may be appraisal fees, storage fees and handling fees. Each state sets the cap for what percentage a pawn shop can charge in fees.
If your plan is to sell the item outright, try Craigslist or eBay first, Castanon says, because you’ll get closer to the actual value.
5. Friends and relatives
If you’re comfortable asking a relative for money, odds are you’ll get the money and get it quickly. You’re family and you’re in trouble, after all. Plus, you’ll likely get the money without having to fill out any forms or pay interest, and you may have longer to pay the loan back than you would with a traditional loan.
Disadvantages: Family members may get more information about your finances than you had planned to share. Also, you’re indebted to someone close to you, instead of a merchant or bank.
If you’re the relative considering a loan to a family member, do it only if you can live with the possibility the person won’t ever pay you back, Castanon says. If the intention truly is to have the money paid back in a timely manner, both parties should sign a contract to avoid misunderstandings and hard feelings, she says.
Another places to turn for help
If your credit cards are maxed out, and it’s a true emergency, your credit card issuer may be willing to temporarily increase your credit limit.
“As long as you don’t have a late payment, you’re just maxed out, many will give you a $400, a $900 increase. It’s not uncommon at all for them to do that,” Opperman says. “That’s the first thing I would do before I start looking at other loans.”
Another place to turn is your workplace. Your HR department may be willing to give you an advance on your paycheck without the punishing fees of payday loans. A company also may be willing to let you trade some unused vacation days for cash, though it’s usually larger companies that would consider this.
“They can’t fire you for asking,” Opperman says.