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Unexpected expenses, are by nature, unplanned … and costly.
While it’s best to have a rainy-day fund, for many this is just a dream.
If you’re unsure how you’d survive a financial emergency, you’re not alone. A survey found that 47% of Americans would borrow for a $400 emergency.
As a credit union member, you have borrowing options. Two popular choices for emergency funding are personal loansand credit cards.
Here are several pros and cons to each.
Credit cards have credit limits in the thousands, enough to cover a small emergency. The value of credit cards is their convenience; there’s no need for a new loan each time you incur an expense.
However, many people don’t have sufficient credit to cover major financial emergencies and instead choose to utilize a personal loan.
Your personal-loan approval amount depends on several factors: income, credit score and other assets. For borrowers with good credit history and a strong ability to repay, these loans could be $50,000, enough for serious unexpected expenses.
2.) Repayment options.
Credit card repayment is handled monthly. There’s a minimum payment and no fixed term to repayment; if you continue charging and only pay the minimum, paying off your loan can take forever.
In contrast, a personal loan, includes a fixed monthly fee that lets you repay the loan in a set amount of time. It’s amortized so you’re making equal payments of both interest and principal over the loan’s life. There’s also no penalty for early repayment.
Credit cards only work at a merchant terminal; they’re difficult to use for paying back friends.
A personal loan is deposited directly into your draft account. You can withdraw it as cash, write checks or use auto draft features.
If you’re negotiating a reduced price for a major expense, many businesses offer a cash discount- they pay for processing fees and prefer cash. If you’re paying a hospital, they may also accept a lower fee if you pay cash.
4.) Interest rates
Credit card interest rates can be high; the global average is 15%. Some credit cards fluctuate their interest rates based on the prime interest rate and can alter your rate if your credit score changes dramatically, making it difficult to plan your financial future.
A personal loan has a fixed interest rate that never increases if you don’t miss a payment. You can make a future budget that involves paying a fixed amount over approximately 5 years.
Interest rates on personal loans are usually lower than on credit cards. For people with average credit, interest rates can be 5% lower; for those with better credit it can be even lower.
Members of Aspire FCU have access to competitive rates for personal loans. If you’re in a hard place, we can help.
Your turn: What’s your emergency financial plan? How would you cover an unexpected $400 expense? If you’ve had a financial emergency, what advice can you give others?