No matter how carefully you manage your money, there are times when the world starts asking for a little more cash than you’ve got on hand.
Whether it’s a family emergency, college tuition or paying for those last extras on your daughter’s wedding, it’s not a bad idea to know a few strategies for getting cash fast.
The key to raising cash is to do it wisely. In other words, never borrow for luxuries, such as a vacation or a new car. If you do that, you may find yourself in a tight spot when a real emergency comes up.
One option that’s become increasingly available is to borrow from your company’s tax-deferred retirement plan. About 65 percent of the companies that have 401(k) plans or other tax-deferred retirement plans now offer loan provisions.
Companies frequently keep employees from overextending themselves, no matter how much money has been salted away, by placing limits on the amount borrowed, typically 20 percent of an employee’s annual salary.
One of the advantages of this approach is that anyone who contributes to the plan automatically qualifies for a loan. The interest rate is usually a few points lower than what you would pay at the bank, and because you’re borrowing the money from yourself, the interest you pay on the loan goes back into your retirement account.
And there’s another job-related way you might be able to raise some cash: If your company belongs to a local credit union, join. It usually requires only a small deposit to do so.
Even if your company doesn’t have a credit union, there are a few that accept individuals. For an account at Consumers Cooperative Credit Union in Waukegan, for instance, you pay a one-time fee of $5 to join. Then you put $50 in a savings account and you’re a member. After that, if you want to apply for a loan, you fill out an application and within one day you’ll know whether your loan is approved.
“One of the biggest things we look at in the credit application is character,” says Bill M. Reidel, president of the organization. “How people conduct their credit, how long they’ve been on their job, how much they’re making. And that’s really what determines whether a person gets a $200 or a $5,000 or a $10,000 loan.
“If you’re dealing with a person who has very little unsecured debt, has a good credit reference and good debt-to-income ratio, we feel comfortable in giving more because he has shown that he won’t misuse it.”
Reidel says his credit union makes a lot of vehicle loans-many in the $12,000 to $15,000 range-for both new and used cars. “Used cars have taken off with us because people are trying to avoid the sticker shock.”
Using your life insurance
Another option for raising cash is to borrow against a life insurance policy, such as whole life, that has cash value. The amount you wish to borrow depends on the cash value accumulated within the contract, which, in turn depends on how long the policy has been in force and the premium paid.
The interest rates are usually between 5 percent and 8 percent, there’s nobody checking on your credit record, and you can repay the loan when you want or not at all, though you must pay the interest on the loan. Keep in mind that the unpaid balance of the loan is deducted from the death benefit your beneficiaries receive.
An obvious source for cash is your own bank. Nowadays, most banks will help you out in a fix. For example, First National Bank offers a line of credit, which acts much like a credit card.
“Let’s say someone comes in and needs $2,000 to pay for a wedding,” says Pete Reed, head of consumer loans. “He fills out a loan application, and if he’s approved, we’d give him a $2,500 line of credit and a regular checkbook that accesses that line.
“That works very nice in a case like this, because they can take that checkbook and write checks to whomever they owe money to. The rate of interest on that line of credit is going to be 5.4 percent over the prime rate. So the rate on it would be about 12.65 percent.”
Another possibility is to set up an automatic overdraft on your checking account, which would allow you to write more checks. While overdraft protection can come in handy, it shouldn’t be overused because the interest rate is steep, around 18 percent.
It’s also important to find out whether the overdraft amount will be automatically repaid out of your next deposit or if you have to notify the bank to have it repaid. Automatic repayment is preferable because it prevents interest from accruing.
A margin loan
If you own stocks, you can borrow from your stockbroker up to half of the market value of any security you own, which is called a margin loan. The stockbroker charges an interest rate that usually is slightly above the prime; the rate is low because the loan is based on your fully secured asset.
But the danger here is that since the stock market is volatile, it’s easy to lose money if the value of your stock drops. Since you can legally borrow only half of the market value of the stock, your broker will demand that you come up with the difference. If you can’t, the broker can sell your stock at the worst possible time-when the market is falling.
If you’re going to seek a loan, it helps to come prepared. Gather your financial records, including bank statments, broker or mutual fund statements, a list of credit-card account numbers and a personal budget. It’s even a good idea to get a copy of your credit report from the credit bureau and clear up any errors before you apply for a loan.
Finally, many people turn to family or friends when they’re in need of cash. There’s nothing wrong with that as long as you treat the loan in a businesslike manner. Even if you’re not being charged any interest, you should sign a note that indicates the terms of the loan, including how much you’ve been given, when the actual transaction took place and when you intend to repay it.
If you can’t pay it back at the agreed-upon time, make sure you let the lender know. Nothing can strain a relationship more quickly than an unpaid debt between relatives or friends.
