Emergency Financing

Financial surprises happen to the best of us. Sometimes it feels like no amount of planning can prepare us for a financial hit. If your car breaks down, your home needs emergency repairs, a beloved pet becomes ill or a family member requires a hospital stay, you may need emergency financing to get through it.

With so many financing options available, how do you determine which will best address your needs? Which financing option will help you deal with your emergency without creating a huge debt hole that you must spend years digging yourself out of?

Consider these options for emergency financing:

1.     Payday loans. Payday loans can vary significantly from state to state. Read the terms and conditions, especially the fine print. This type of financing relies on your paystubs to determine your eligibility amount. Some require paying off the loan the next time you're paid, while others offer you a repayment period of several weeks.

·       This type of loan has extremely high fees. If you must use this type of financing, pay it back immediately to save yourself a lot of money. This type of loan is not recommended.

2.     Unsecured bank loans. These are traditional bank or credit union loans. They don't require collateral but their perceived added risk translates to a higher interest rate. Only obtain an unsecured loan that you are sure you can repay within the term period.

3.     Secured bank loans. Secured bank loans require that you put up collateral, but the lower perceived risk for the lender translates into a longer loan term for smaller monthly payments and a lower interest rate. If you have collateral like equity in your home or a vehicle, this type of loan can be ideal.

·       Only take this type of loan out if you are certain you can pay it back. If you default on a secured loan, you lose ownership of your collateral.

4.     Credit cards. If you have a credit card, you may be able to obtain a cash advance. This allows you to turn credit into cash quickly. Cash advances can come in handy when you can afford them. They do come with high repayment interest rates, however, so use them with caution and careful consideration.

5.     Direct deposit advance. Offered by some banks, including Wells Fargo and US Bank, a direct deposit advance is like a payday loan. If you get direct deposit, your bank will extend you a temporary loan until money appears in your bank account again. Contact your bank to find out if this option is available to you.

6.     Home equity line of credit. If you have a home equity line of credit, you can tap into it to get emergency financing when you need it. Talk to your bank or credit union about their options for lines of credit. This type of credit is available to those with good credit scores.

·       Use this option with careful consideration, because the interest rate for a home equity line of credit can be hefty.

7.     Savings. This is where having an emergency fund or rainy day fund really comes in handy. If you have a savings account that you can tap into, you should absolutely do so. Replenishing a savings account after a financial emergency is easier than attempting to repay a loan with interest rates and other fees involved.

The Bottom Line

No one financing option is better than the others for everyone or every emergency. Look at each financing option and decide which one will best suit your family and financial situation. Financial emergencies can be scary and frustrating, but they don't need to destroy you financially. The right type of funding can have you back on your feet in no time.