Should you use personal loans to cover expenses without unemployment benefits?

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As of September 5, 2021, several federal pandemic unemployment benefit programs have expired, including Pandemic Unemployment Assistance (PUA), Pandemic Emergency Compensation (PEUC) and Federal Pandemic Unemployment Compensation (FPUC) of $ 300. And while traditional unemployment insurance benefits are still in place, the expiration of these temporary programs may have created a gap in the ability of unemployed Americans to meet their expenses.

Many Americans are now looking for ways to make up for this loss in order to fully cover their expenses. People often use credit cards to increase their income, but personal loans have become a common way for people to cover a variety of major expenses. In fact, as of 2019, personal loans have become the fastest growing debt category for Americans, and it can be a tempting choice for additional financing.

Personal loans generally have lower interest rates than credit cards (your exact rate will depend on your credit score). And there are even lenders who will always approve you for a loan if your credit is bad or fair. They also allow you to borrow up to $ 100,000, which can come in handy if you don’t know how much money you’ll need to borrow to cover your expenses until you can find a job. Personal loans also have fixed repayment terms, which can give you more time to pay off the full amount you borrow.

And while setup fees and prepayment charges are common among personal loan terms, some lenders, like LightStream personal loans and Marcus by Goldman Sachs Personal Loans – do not charge these fees.

However, if you are affected by the loss of extra unemployment benefits and you don’t have enough money to start repaying the loan, it could end up creating a sticky situation where you have extra large debt that you have. must repay. top of your daily expenses.

So if you need additional financing to cover some expenses, is it a good idea to take out a personal loan to get that money? The short answer is, it’s an option worth considering, but there may be better ones.

When looking for a personal loan, it can be helpful to compare several different offers to find the best interest rate and payment terms for your needs. With this comparison tool, all you need to do is answer a few questions and Even Financial can determine the best deals for you. The service is free, secure and does not affect your credit score.

Editorial note: The tool is provided and powered by Even Financial, a search and comparison engine that connects you with third party lenders. Any information you provide is transmitted directly to Even Financial. Select does not have access to any of the data you provide. Select can receive an affiliate commission on partner offers in the Even Financial tool. The commission does not influence the selection in the order of the offers.

Use all your savings, even if you have to dip into a retirement account

Before you think about going to a lender and comparing interest rates, exhaust all other savings options you already have. The first place you should look for money is your emergency fund. Experts generally recommend keeping three to six months of necessary spending in a high-yield savings account to keep you afloat in the event of job loss, medical bills, or a surprise home or car repair.

“One of the main functions of an emergency fund is to act as a financial buffer, so that when things like this happen, you don’t have to go into debt or access your account. pension to cover expenses, ”said Alicia Hudnett Reiss, a Certified Financial Planner. “That’s why it’s so important to set aside cash savings. “

If you’re dipping into your emergency fund and still need more money, you might consider other savings. These could be your retirement accounts, although borrowing from your retirement fund is often not a good idea unless your situation is dire.

“I don’t like to advocate for the depletion of retirement accounts, but everyone’s situation is different,” said Hudnett Reiss. “If it’s just for the short term and all you need is a little cash, this might be an option.” But she also explains that if you do decide to withdraw money from your retirement accounts to pay for necessary expenses, you must do so with a specific strategy in mind.

According to Hudnett Reiss, you should start by making withdrawals from any Roth account – a Roth IRA or Roth 401 (k). This is because your contributions – not your earnings – to Roth accounts can be withdrawn tax-free and without penalty, even if you make the withdrawals before the age of 59 1/2. This means that you will not be penalized or hit with a tax bill for using your own contributions from your Roth retirement account.

If you don’t have a Roth retirement account of any kind, you can always consider withdrawing money from a 401 (k) account offered by your employer. You may be able to argue for a withdrawal in case of hardship, which would allow you to make a withdrawal without penalty if you are under 59 1/2 (funds do not need to be returned but you will have to pay taxes on the amount you withdraw since the 401 (k) is a pre-tax account). Just keep in mind, however, that employers aren’t required to offer a hardship withdrawal, so you’ll need to check the terms of your workplace pension plan.

Consider putting your expenses on a credit card

If you think you need more than a few months of extra cash to stay afloat, you might want to avoid taking too much money out of your retirement fund. Hudnett Reiss explains that this is where a credit card can come in handy. But when you do decide to take on any additional debt, whether it’s using a credit card you already have or applying for a personal loan, you need to have a plan for how you’ll make your payments, especially if you are. are currently unemployed.

“As a general rule, you shouldn’t be using a credit card to pay for necessary expenses,” said Hudnett Reiss. “But if someone doesn’t have savings and can’t access an income, they may still be using the credit card. Some of the benefits that a personal loan won’t have.”

One of those benefits is a much lower minimum monthly payment. The minimum monthly amount owed on your credit card bill each month is usually less than $ 100, unlike a personal loan, which has a fixed monthly payment which will depend on the amount you borrowed and the interest rate. And as long as you pay the minimum amount required on your credit card bill, you won’t have late fees.

“For this reason, it may be easier to use a credit card to float your spending,” said Hudnett Reiss. “Then once you’ve found a job and started earning an income again, you can stop using your credit card to cover the costs. “

Another advantage of using a credit card is that unlike a personal loan, there is no fixed repayment term, so once you start earning income again, you can work in such a way. aggressively to quickly pay off credit card debt. However, the repayment term for a personal loan can range from two to seven years.

Just be aware that the interest rate on a credit card is often higher than that on a personal loan. According to the Federal Reserve, the current average APR for a two-year personal loan is 9.58%. In contrast, the average interest rate on a credit card is 16.30%, but can reach 24%. However, if you use a credit card with a 0% APR introductory period, you can make purchases without earning interest for a certain period of time. The Citi Simplicity® card, for example, allows you to make interest-free purchases for the first 18 months (thereafter, 14.74% to 24.74% variable). And the Amex EveryDay® credit card offers a 0% APR offer for purchases made during the first 15 months (afterwards, 12.99% to 23.99% variable, see rates and fees).

Citi Simplicity® Card

  • Awards

  • Welcome bonus

  • Annual subscription

  • Intro APR

    0% for the first 18 months on purchases and balance transfers (balance transfers must be made within 4 months of opening the account)

  • Regular APR

    14.74% to 24.74% variable

  • Balance transfer fees

  • Foreign transaction fees

  • Credit needed

Amex EveryDay® Credit Card

Amex EveryDay® credit card information was independently collected by CNBC and was not reviewed or provided by the card issuer prior to posting.

  • Awards

    2X Membership Rewards® points in US supermarkets up to $ 6,000 per year in purchases (then 1X), 1X Membership Rewards® points per dollar spent on all other purchases

  • Welcome bonus

    Earn 10,000 Membership Rewards® points after making $ 1,000 in purchases in your first 3 months

  • Annual subscription

  • Intro APR

    0% for the first 15 months on purchases, N / A for balance transfers

  • Regular APR

    Variable from 12.99% to 23.99%

  • Balance transfer fees

  • Foreign transaction fees

  • Credit needed

At the end of the line

The expiration of additional unemployment benefits can leave many Americans in dire financial straits, especially if they are not able to fully cover their household expenses without the extra money.

And while there are other funding options they can turn to – withdrawing from their retirement account, recording expenses on a credit card, or even taking out a personal loan – each option comes with its own set of benefits. and disadvantages.

There is no perfect option without compromise; It’s important to make sure you have a plan to pay off any additional debt you incur or to replenish the money you borrow from your retirement account or emergency fund.

To find out the rates and fees for the Amex EveryDay® credit card, click on here

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.

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