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When you need money in a crisis — to pay for car repairs, an overdue bill, or a trip to the emergency room — you may not take time to think about your financial future.
But being smart about how and from whom you borrow could save you money and keep your debt under control.
Before you borrow money from a lender, ask yourself a few questions to better understand your options and the true cost of borrowing. Your wallet will thank you after the crisis is over.
1. What are my other options?
Before turning to a fast cash lender, run through your options, says Scott Astrada, federal advocacy director at the nonprofit Center for Responsible Lending.
Can you borrow money from family and friends, or a local nonprofit or religious organization? Will your employer allow an advance on your paycheck?
Selling items online or to a pawnshop is also a way to get cash fast, Astrada says.
2. How much can I afford to borrow?
If you decide to borrow from a lender, start with a snapshot of your cash flow.
Check your last three pay stubs for your average income, and add up your monthly bills, says Debbie Murphy, senior credit and housing counselor at Guidewell Financial Solutions, a credit counseling agency. Calculate the difference to see how much you have left to work with, and then look for expenses you can cut right away, she says.
Astrada says understanding your cash flow will also help you estimate the monthly payment you can afford on a loan.
You can also use a personal loan calculator to estimate payments based on your credit score.
3. Can I trust this lender?
“When you’re in a bind, there are a host of financial institutions willing to take advantage of that, which will put you in a worse situation,” Astrada says.
Reputable lenders look at your credit score, credit report and the ratio of your debt to income to see if you can repay the loan. Check your own credit score and report for free before you apply to better understand your chances of approval, Astrada says.
Murphy recommends starting with your local credit union or bank for a loan, because you may already have a trusted relationship.
Many credit unions offer emergency loans as low as $500, she says. Some federal credit unions offer payday alternative loans, which carry a maximum annual percentage rate of 28%, well below the triple-digit average rate from payday lenders.
If you consider an online lender, check its Better Business Bureau rating and reviews on other websites, as well as complaints reported to the Consumer Financial Protection Bureau, Astrada says.
4. What will this loan truly cost?
The annual percentage rate of a loan is the total of the interest rate and any upfront fees a lender charges. Use it to compare the cost of your different loan options. The convenience of a quick loan may cost you a higher APR.
“The best way to find the loan that’s most affordable is to shop around,” Astrada says. The loan with the lowest APR for a given term is the cheapest option.