Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode starts with a discussion about how to help small, local businesses, which have been hit much harder by the pandemic than the big online shopping sites. One way is to seek out local sources for products you might otherwise buy from the online megastore. Another is to order directly from local restaurants rather than using delivery apps. If money is tight, a social media shoutout or five-star review can help others discover local gems.
Then we pivot to this week’s question from Michelle. She says, "I recently got into a fender-bender that left the back of my car pretty messed up. It still drives, but one of the doors doesn't open, and a window is cracked. I want to get it fixed, but I don't have enough cash to cover the repair. I'm thinking of getting a small loan, but I don't have great credit. What do you think would be the smart thing to do?"
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Many people aren't prepared for unexpected expenses, including car repairs. If they don’t have savings or good credit, a so-called “small-dollar loan” may seem like a good option.
Small-dollar loans are usually for amounts of $2,500 or less. Banks, credit unions and reputable online lenders typically don’t make loans this small, so people often turn to payday lenders or unsavory online outfits. Interest rates can be extremely high and you may have only days or weeks to pay off the loan, increasing the chances you’ll have to renew the loan or borrow elsewhere to pay it off. This is known as a debt trap.
Some credit unions offer “payday alternative loans” that allow people to borrow small amounts at reasonable interest rates. Borrowers can pay off the balance over 6 to 12 months, reducing the chances they’ll have to borrow again.
Michelle’s car is still drivable, so she may have time to save up the cash she needs. If not, she has time to check with local credit unions to see if any offer these alternative loans. A co-signer also could help her get a loan at a reasonable interest rate, or she could look for lenders willing to make secured loans — personal loans backed by an asset, such as a car or home — at a reasonable rate.
Explore your options. You may be able to borrow from your local credit union, or from family and friends.
Bad credit equals higher rates. If your credit isn’t great, you may be able to qualify for a lower rate by getting a co-signer or a secured loan backed by an asset you own, such as a house or a car.
Know the risks. Some small-dollar loans, including payday loans, can carry astronomically high interest rates, which can lead to a cycle of debt.
More about emergency loans on NerdWallet: