This is article four of Part Two of the “Conquering Debt Series.” Read Part One here.
When your financial situation becomes severe and you need money quickly, it becomes easier to make decisions that could be harmful more than helpful. It's like that saying, “Desperate circumstances call for desperate measures.”
If you are behind on bills or need to protect your assets from collections, finding solutions to come up with extra money can seem like an impossible task. It's important to make smart decisions in your moment of desperation, so you don't make your situation even worse.
Here are five options for coming up with extra money that you need to consider with caution.
BORROWING FROM FRIENDS OR RELATIVES
Friends or relatives may be able to help you out in your time of need, but you need to be careful. In general, there is nothing wrong with accepting help from loved ones to get you through a tough period, but you need to be aware of the problems that could arise.
Look at it this way. If you borrow money from a bank, there is a good chance that you will never see that lender again. With family or friends, you will see them for the holidays, at birthday parties, for family get-togethers, and many other occasions.
There is always a risk of damaging the relationship. You should never assume that everything will turn out well if you decide to accept money from a relative or friend. If you don't end up paying back the borrowed money, this could end the relationship.
You also need to consider the fact that your loved ones have more limitations on the amount of money they have access to than a financial institution. If you borrow money from someone who has their own financial hardships, they could hit a rough patch and ask for early payment. What happens to the relationship when you can't afford to meet their requests?
The bottom line – the value of your loved ones shouldn't be jeopardized for dollar bills. Taking a loan from the people you care about doesn't work out for everyone, so it's essential to analyze your needs, estimate what your family can manage and weigh all of your options.
DIPPING INTO SAVINGS
Setting aside even a tiny amount each month as savings is extremely important. If you have been doing this and have some savings set aside, you may be faced with the possibility of using some of your hard-earned savings to deal with current financial problems.Using your savings should be part of an overall plan, not your ONLY plan.Click To Tweet
Using savings or other assets to pay low priority debts is generally not a good idea. If your income does not meet your necessary expenses, your savings should only be used to protect valuable property or to pay for life necessities.
Savings also means your retirement money. You may be tempted to dip into your retirement savings to get you through temporary financial problems. The most important consideration is whether you will have time to rebuild these savings before you retire.
You might also consider withdrawing money from a tax-deferred account such as an IRA or 401(k). There are serious disadvantages to this option, including possible tax consequences.
USING YOUR SAVINGS
If you decide to use your savings, you should consider these two choices.
- Some people use a set amount of their savings each month in their monthly budget to meet essential expenses. This can be the right choice if you have good discipline and the savings will make the difference between meeting your necessary expenses and falling hopelessly behind. You should never use your savings to finance an unrealistic lifestyle.
- Another way people may use savings is to spend them in a lump sum for a particular purpose, like paying down a mortgage default. This choice may be necessary to postpone a catastrophic loss of property to foreclosure or repossession.
However, you should be careful not to make this choice unless you have a longer-term plan to get back on your feet. Paying thousands of dollars for a mortgage to keep a home you can't afford in the long term may be a waste of money.
Also, if you plan to use savings on a mortgage or a car loan, you should probably avoid paying ahead. Use your savings to get caught up and then keep any extra money to make future payments as they come due. This will give you more flexibility in the future.
You might think it's wise to pay down principal due on debt in good financial times to reduce total interest payments, but the opposite is true if you are having financial difficulties. A lump sum paid on the principal will not excuse you from future payments. The loan must be fully paid off. That means even after you pay a lump sum as an advance on the principal, the next monthly or weekly payment will be due as scheduled. You will still be in default if you don't pay it.
To come up with extra money quickly, you might consider selling a significant asset such as a car or house if you can no longer afford the payments. You will almost always do better selling the property yourself rather than hoping to get cash back from a foreclosure or repossession sale.
Before selling your home or car, make sure you have alternative housing or transportation. Otherwise, you could end up in even worse trouble. Also, if the assets are securing a debt, you will need to ensure that the sale price will cover the payoff on the existing loan and that secured debt is paid off to transfer title. If you want to sell the item for less than what you owe, you will have to get the creditors permission to sell the assets.
Significant assets are not the only possibilities. You might be able to raise money, mainly to help you in the short-term, by selling items you don't need such as old bicycles, furniture, or other household items. You might consider a yard sale or placing an ad in your local newspaper or online.
USING CREDIT CARDS TO BORROW MONEY
Taking out new unsecured credit, such as adding to your credit card debt, is better than incurring new secured debts. Nevertheless, use of credit cards to balance your budget will ALWAYS make your financial situation worse.
Credit card debt is high-interest debt with potential penalties for nonpayment. If you intend to make only the minimum payments each month on the bill, your debt will quickly compound – making it unlikely that you will ever get back on track.
If you're thinking that filing for bankruptcy can solve this problem, this may not be true if you run up big bills or take cash advances just before filing. Creditors have argued with some success, that if you use a credit card at a time when you could not repay, you have committed a fraud that prevents the debt from being eliminated in the bankruptcy process.
USING PAYDAY LOANS TO GET MONEY QUICKLY
If you are looking for ways to bridge the gap between paychecks or are looking for some extra money to get you through a short-term situation, you may be considering a payday loan.
A payday loan is a short-term, high-interest loan, usually under $500, that's designed to give you quick cash. The ability to get money in your wallet quickly is nice, but payday loans always give you more than what you bargained for.
When working with payday loans, you usually give lenders access to your checking account. They require you to write a check for the full balance in advance, which they will deposit when the loan comes due.
For example, let's say that your car broke down and you need it urgently to get to and from work. You decide to borrow $300 for the repairs from a payday lender. You will write a post-dated personal check for $340 (the amount, plus a $40 finance fee), made payable to the lender. The lender then advances you $300 for a short period, usually around 14 days. When that period ends, you pay the lender $340 cash, let them deposit the post-dated check or write another post-dated check for the amount, plus an additional fee.
Keep in mind that if you don't pay the debt in full by the end of the term, you will be charged additional fees.
So what makes these types of loans so dangerous? If you can't repay the payday loan quickly, you will be charged expensive additional fees. It's very easy to become stuck in a payday loan cycle for a long time and can lead to further financial troubles.
Payday loans are also a lot more expensive than other methods of borrowing money. In most cases, the annual percentage rate (APR) on a payday loan averages about 400%. It's not uncommon to see the APR as high as 5,000%.
If you are looking for quick money, you should avoid payday loans at all costs. You should examine other options available to you.