When financial emergencies pop up in your life without warning, the best way to handle unexpected expenses is with your emergency fund. Unfortunately, not everyone has financial protection in place in the form of an emergency fund. Without an emergency fund, even a minor unexpected event can throw off your entire budget.
If you do not have money set aside to handle expenses like these, borrowing money might be the best option for covering costs without missing your monthly bills. Determining whether borrowing money is the right decision for you will depend a lot on your unique situation and which way you choose to borrow money. There are many ways to borrow money, and some are more beneficial than others.
Is It a Bad Idea To Borrow Money?
As mentioned above, the best way to go about handling financial surprises is to rely on an emergency fund. Having an emergency fund will allow you to avoid borrowing money for every minor inconvenience.
Though borrowing money occasionally isn’t a major issue, doing it all the time without discernment or thoughtfulness can be a bad idea. Getting a personal loan when you don’t have other options isn’t a problem, but it shouldn’t become a habit.
For those without a savings, borrowing money may be the best option for you. If you do borrow money to handle an unexpected expense, it is a good idea to prepare for next time by saving up an emergency fund once you are financially stable again, so you don’t need to get a loan next time.
Reasons To Borrow Money
There are many reasons why people choose to borrow money. It is essential to determine whether the reason you need to borrow money is necessary enough to justify the origination fees and interest charges you will likely need to pay if you get a personal loan.
Some of the many reasons why people borrow money include:
- Home or vehicle repairs that can’t be put off.
- Consolidating credit card debt for better interest rates and simplified monthly payments.
- To cover moving costs, especially when making a long-distance move which can be quite expensive.
- Unexpected medical bills for you or a family member that aren’t covered by insurance.
- To buy a car or a house. Auto and mortgage loans are credit products designed specifically for these large purchases.
- Needing a cash advance to cover living expenses until the next paycheck.
- Paying for higher education, including tuition, textbooks, room and board, etc.
Whatever your reason for borrowing money, we advise you to consider all your options carefully before making a decision. Although this financial crisis may be stressful, know that you will get through, and there is an abundance of ways to get the funding you need so you can get back on your feet again.
Most Common Ways To Borrow Money
When you don’t have enough money in your bank account to cover the costs of a necessary expense, there are several ways to borrow money for you to choose from. What you decide on will likely depend on what options are available to you and what your current financial situation looks like.
From a Friend or Family Member
If you are lucky enough to have a good support system surrounding you, you may be able to ask a friend or family member to lend you some money. Many people turn to family or friends who are in a better financial position than they are to borrow some cash.
Sometimes the person will ask to be paid back once the borrower has gotten back on their feet after the financial crisis, while others may just be glad to help out and don’t expect the money back. Either way, the borrower won’t need to pay interest on the borrowed money which can save a significant amount of money. If this is an option that might be available to you, explore it first before turning to other borrowing options.
Traditions Loans From a Credit Union or Bank
Many individuals looking for a loan turn to traditional lenders by going to a financial institution like a bank or credit union. Credit unions offer excellent interest rates on installment loans to their customers, but you must be a credit union member to qualify for them.
While credit unions and banks may offer more competitive interest rates compared to online lenders, their loans might be more difficult to qualify for unless you have good or excellent credit scores.
Credit card accounts are an incredibly popular way to borrow money. As a form of revolving credit, a credit card company will approve you for a certain credit limit which you can spend up until, and as you pay down the balance, you are able to keep spending.
It is also possible to use credit card accounts to access cash. A credit card cash advance has very high-interest rates and must be repaid in one lump sum, so it is not advisable to get one unless as a last resort.
Personal Loans From Online Lenders
A personal loan is a commonly used solution to borrowing money, especially as the amount of online lenders has increased in recent years. It has become exceedingly convenient and easy to obtain a personal loan online that fits with your budget and credit score.
Unsecured loans are likely to have a slightly higher interest rate, so it is vital that you calculate what your monthly payments will look like so you can be sure you will be able to afford the loan before you sign the contract.
Short-term loans are a common option for those who need quick cash but don’t have a credit score high enough to qualify for other lending products. Payday loans are a common type of short-term loan designed to help borrowers cover expenses until their next paycheck. Along with very short repayment periods, payday loans also have incredibly high-interest rates, making them challenging to pay back.
Also referred to as cash advances, online payday loans can trap you in a cycle of debt if you are not prepared to pay off the balance before the due date. We recommend thinking carefully before getting an online payday loan and only relying on them when you have no other options.
Tips for Paying Back An Existing Loan
Keeping up with your loan repayment terms can sometimes be overwhelming, especially if you are still recovering from a financial crisis. The goal of handling your existing loan is to not only pay it back but do so in a way that leaves you in a better financial position than you were when you started.
Here are a few tips and tricks for how to go about paying off your loan, so you keep your finances healthy:
Avoid Late Payments
Always make your loan payments on time to protect your credit score. Late or missing payments have a negative impact on your credit report. If you aren’t careful in the handling of your installment loan, you could lose your good credit score or further damage your already bad score. Whether it is a personal loan or a credit card, make your monthly payment by the due date.
Pay Off the Loan Early, If Possible
If the lender you are working with doesn’t charge prepayment penalties, consider paying off your loan as early as possible. Paying off your loan several months ahead of schedule could save you a significant amount of money on interest. This is a good idea, particularly for those loans that have higher interest rates.
Check Your Credit Report
You are entitled to a free copy of your credit report every year from all three credit bureaus. By checking all three of your credit scores as you pay off your loan, you will be able to spot any inaccuracies or errors in reporting. Having a good credit history will help you access better lending options in the future, so it’s a good idea to keep yourself informed on the state of your report and prevent any errors from going undisputed.
Prepare For a Future Financial Emergency
Once you have repaid your loan, creating an emergency fund is one of the best ways to improve your overall financial health for the future. Starting your own emergency fund will allow you to avoid needing to take out a loan in the future. We recommend starting at $1,000 and working your way up to a more considerable amount once you feel more financially stable.
If you have money set aside to handle all future emergencies, you will negate the need to take on interest-bearing debt unless you wish to. No more pulling your hair out trying to figure out how you are going to cover a medical bill or car repairs. An emergency fund will save you a significant amount of money, time, and stress!