Difficulty Paying Your Bills — What Are Your Loan Options?

The Best Ways to Borrow Money

Difficulty Paying Your Bills — What Are Your Loan Options?
January 14, 2014

It happens to nearly everyone from time to time: Get laid off from your job, or suddenly your washer and dryer both die at the same time, or you have a completely unexpected medical emergency that is not covered by your insurance. You find yourself strapped for cash, making it difficult to pay for not only your rent or mortgage, but also for your credit cards and other outstanding debt.

You do have options when it comes to borrowing money, and some are better than others. Here are a few of the better choices should you need money to stay financially afloat.

Personal loans from your bank

For a down payment on a new car or catching up on a few utility bills, banks offer personal loans for a wide variety of needs and circumstances. These loans are generally unsecured and supported by your own creditworthiness, and can range from a few hundred dollars to several thousand. Proof of employment is usually required, and the decision process is a quick one — only a few days or less in most cases.

Bank loans are a great way to get small amounts of money fast; however, they usually come at a high interest rate (upward of 12%). Still, if you can handle the higher payments and can repay the loan within a couple of years, they can be a great way to get small amounts of money fast.

Home equity loan

When you borrow money based on the equity you have built up in your home or property, you are taking out a home equity loan. You can estimate how much money is available to you through a home equity loan by subtracting the outstanding balance on your mortgage from your home’s current market value, and multiplying that by 80%. This is a good step to take periodically: you may be surprised at how much – or how little – home equity you actually have available.

Home equity loans can be used for a number of reasons, but they are generally used to make repairs or additions to the home. Try to avoid buying big-ticket items with your home equity loan, such as a boat or luxury car; instead; put the money where it can do the best work for you.

The upside of home equity loans is that they can be paid off over long periods (15 or 20 years or more), which is perfect if you want to borrow a large amount of money. Additionally, the interest paid on your loan is usually tax-deductible. The downside is that homeowners can wind up mortgaging their homes into oblivion, and should the only breadwinner in the family become sick or die, there is the risk of the family losing the home entirely.


Credit unions

A credit union is a cooperative financial institution. It is similar to a bank, but controlled by its members and those who use its services. A credit union’s members are made up of participants in specific professions, vocations or other community groups. In order to borrow from a credit union, you must first be a member. If you are a member of the credit union, it can be a very good place to get a substantial loan at reasonable interest rates.

Because credit unions are nonprofit organizations, they can typically lend money at lower interest rates than banks. In addition, certain transaction fees can be reduced or eliminated altogether, allowing members to avoid the endless nickel-and-diming that plague most standard banking transactions. On the downside, credit unions rarely offer ATM access (or a limited number of ATMs should they offer them at all), and they do not return checks back to owners after the check has been drafted. So if you join a credit union to take advantage of better loan terms, be aware of these quirks.

Credit cards

When consumers use credit cards to get out of debt, they are usually robbing Peter to pay Paul. However, when you need money quickly, they can be attractive sources of funds because they are accepted just about anywhere in the world, and can be used to pay for anything you want.

The downside of credit cards is that they carry high interest rates, often as high as 20% or more per year. In fact, people tend to rack up more debt using credit cards than from any other loan method. Unless you can keep up with higher credit card balances, it’s best to use credit cards for small purchases or in case of emergency when you have no other option available to you.

Cash advances on credit cards

Cash advances are short-term loans offered by credit card companies that allow cardholders to get cash out of ATMs or directly from their bank. They typically carry higher interest rates than the actual credit card, and the interest payments add up the moment the money is withdrawn.

The only upside to a cash advance on your credit card is you can get cash immediately when you have no other options. There are numerous downsides, including:

  • The interest rates and additional fees (such as those charged by the ATM) are very high
  • Loan amounts only go as high as a few hundred dollars, so they aren’t practical for large purchases
  • Interest on the cash advance is not tax deductible.

Payday loans

Avoid these at all costs. Their interest rates are extremely high (up to 400% annually!), and because this interest comes out of your pocket, they are a debt trap, pure and simple. There is a term sometimes used in connection with organized crime: “loan sharking” involves charging exorbitant interest rates on short-term loans similar to these. You wouldn’t approach a criminal to obtain a loan of this type, so avoid payday loan operators as well.

Conclusion

There are many potential avenues to pursue when you need money in a hurry, but we think a great place to start is with your local bank or credit union. Whether the amount you need is relatively small or extremely large, your bank can advise you on the best way to obtain it. Also, remember the vast informational resources available to you through the Internet, bookstores and your local library. You may be surprised at how quickly you can get your hands on much-needed cash in a short amount of time.

If you are interested in a personal loan, visit our curated list of top lenders.

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Meredith L | 08.12.15 @ 05:44
We're starting from scratch and rebuilding our credit. Our options are pretty limited but with the track we're on, hopefully we can get approved for a small credit-building loan through the bank.
$commenter.renderDisplayableName() | 12.05.16 @ 14:38
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