If, on the other hand, your income isn’t big enough to replace that payment within a month or so, or if using your savings to pay that expense would totally wipe out the account, you might be better off exploring your other options.
Short Term Loans
For example, you might consider taking out a personal or installment loan. You can find online installment loans offered by state-approved lenders pretty quickly and many will fund your request within a day or so. You might have to email in some documents or verify some information over the phone, but typically these are faster and easier to get than a larger loan from a bank. If you know you could pay off the expense within six months or so, an installment loan might be the better option as it will allow you to continue to put money into your savings while also paying down the loan.
Please notice: we did not recommend you take out a payday loan. Payday lenders prey upon people in your exact situation and their fees and interest rates can keep you indebted to them for a very long time. They design the loans in such a way that you constantly need to take them out to keep yourself in the black. Avoid them. There are plenty of really great alternatives out there.
What to Use and When
We talked about the basics of this a little bit already, in terms of cost and account replenishment, but let’s go into more detail. Here are the criteria you should use when figuring out whether or not to use your savings or take out a loan to cover an unforeseen expense.
What is the Expense? If this is a one-time issue and you know you can give it a permanent solution, an installment loan is likely the best option for you because you can pay that expense down over time knowing that once it’s paid off you likely won’t have to deal with the issue again.
Ratio of Cost to Balance: how badly will your savings or emergency fund be affected by this expense? If the cost will eat up more than half of your fund’s balance, you might be better served by the installment loan.
Payment Plan Availability: Find out if you can get an in-house payment plan. If this is available, this is going to be the best option–especially for large expenses like major home repairs or medical bills. You can use a chunk of your savings to reduce what you owe and then pay off the rest over time. This is the best option because the interest rates on these payment plans are usually much lower than you’d pay on a loan. Some plans don’t charge interest at all.
Your Credit: If your credit is really great it is understandable that you might not want to risk it with a loan especially if, again, you can afford to replenish the fund fairly quickly. If your credit is mediocre or even bad, however, an installment loan can help you begin to rebuild that score, provided of course, that you make those payments on time.
Paying Off Installment Loans
Remember, installment loans can often charge high interest rates. This is why you need to make sure that you are able to pay them on time and in full by the end of the term. You should also make sure that you understand how the repayment process works. Stay away from any company that wants to charge you for repaying early!
Understand that you will be paying back more than you get. This is because, to be able to continue lending, installment lenders have to tack fees onto the loans they offer. If you choose a good company, those fees should be relatively low.
Avoid refinancing. Many of these lenders will try to sell you on the idea of refinancing when you are close to paying off your balance. Refinancing extends the term of the loan which seems like it will make it easier to repay. When you refinance, though, you are often given a higher interest rate and you are usually charged more fees.
Installment loans, when you handle them responsibly, can help keep you afloat in the event of an emergency. Just make sure to do your research and choose a good lender.