Financial Alternatives for Handling Crises When You Have No Money
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It’s a pretty common story: you work hard at your job but nearly all of your money goes to paying bills and debts, with maybe a few extra dollars to put in savings or to spend on pleasure. Then, disaster strikes, and you are plunged into a financial crisis. A car breaks down, a cell phone is lost, or an accident sends you to the hospital. You don’t have the money available to pay off these unexpected expenses, nor will you in the near future.
These kinds of difficult situations can make somebody feel trapped, with no solution to a problem that could cripple their life. Take a breath and keep reading, there are solutions if you find yourself in this kind of situation.
Putting Expenses on a Credit Card
Depending on the size of the crisis and how much money it requires, it’s possible to put off paying for it with a credit card. The limitations for this are how high your credit limit is, how much money you owe, and how quickly you will be able to pay off the money you owe.
If the expense you have is something you would handle within the next paycheck or so, but need to put off paying the bill, a credit card can be a good solution. Typically, the payment date for a credit card is on a specific date once a month, with every purchase from within the previous 30 days coming due at that time. Typically, you will receive a statement saying what is owed and a specific date it must be paid.
It’s important, though, to only pay for something with a credit card you can pay off quickly, as some credit cards have extremely high interest rates. Missing a payment on a credit card can turn an affordable expense into a crippling hole of debt. The average interest rate for a credit card is 15 percent. That means if you put $1000 on a credit card and miss a payment, an additional $150 is added to the bill. Just be sure you know how much money you can put on a credit card, as overdraft and over-the-limit fees can be an extra cost you don’t need.
It’s also possible to prioritize your expenses and put off paying other bills with credit cards. For example, say you need to pay for a car repair now and the rest of your bills are due at the end of the month. You use the money that would normally go to bills to fix the car, and then put your bills at the end of the month on a credit card. That way, you have more time to get the money needed to pay the bills without gaining interest on it.
Small Personal Loan
Another solution to paying for a major expense is taking out a small loan, and then paying off the expense over time. This can transform a massive cost and break it down into a more affordable monthly payment while including minor interest over time.
For this to work though, you will have to find a lender and be approved for a loan. A good place to start is with your bank, as they’ll have a good idea of what kind and size of loan you can afford. It’s important that you can afford this regular payment along with your other recurring expenses.
When looking at whether or not to give you a small loan, lenders are going to consider a few different things, particularly your credit score and your debt to income ratio. A low credit score might hint that a person isn’t financially reliable to handle a loan or manages their money poorly. Your debt to income ratio is how much debt you can sustain without running the risk of not being able to pay them off. The standard ratio lenders want to avoid going over is 43 percent, so if this small loan would push a person over, it’s likely they will be denied.
Asking For Money From Family and Friends
While hard to do, and requires a fair amount of swallowed pride, asking family and friends to help you out financially is a very viable solution. They can provide interest free loans (or at least ones with reasonable rates).
The downside, though, is that asking your loved ones for money can place a strain on the relationship. As the one asking for a loan, you place yourself in their power, which can lead to awkward moments. It’s important in these situations to pay back the loan as quickly as possible, as the longer you are in debt, the more frustrated they might become. Failing to pay back a loan can also lead to a loss of trust or even end relationships.
Payday loans are a type of short term small personal loans. The premise is that they can give you money now, on the stipulation that you provide them with your next paycheck plus interest along with a fee.
Now, it’s important to know that payday loans are rarely a good solution. If you have an expense that you can pay off by your next paycheck, try instead to use a credit card. That way, it’s a short term loan of money, but if you pay it off within 30 days, it won’t cost you any interest. If it’s a larger sum of money than what a credit card can cover, it is worthwhile trying to get a small personal loan from a bank or reputable lender.
The only situation in which a payday loan is necessary is if you have a very low credit score, and don’t qualify for a credit card or small loan. With that low of credit, it’s even possible to be denied from a payday loan.
Sometimes, a loan isn’t even necessary to meet both your bills and your unexpected expenses, but this solution does require some sacrifice. By selling unneeded items in your life, you might be able to make ends meet without going into debt. Ideal items to sell are things like: electronics, designer clothing, furniture, jewelry and any valuable items you don’t need.
A great place to start is by selling products on sites like Craigslist, eBay or Facebook’s marketplace. That way, you can sell them for close to what they are worth new, and you get all of the money since there’s no middle man.
If things don’t sell that way, it might become worth looking into hosting a garage sale and instead of selling one or two expensive items, selling large quantities of small goods for a few dollars. A final place to sell stuff are to re-seller businesses, like Amazon or local pawn shops. You won’t get a lot of money, as they are looking to make a big profit when they resell it, but at least you know they will buy it.
Crowdsourcing and Fundraising
In times of financial crisis, many people are turning to fundraising and crowdsourcing sites like GoFundMe to try and get the extra cash. That way, they aren’t asking a single person for a massive loan, but trying to spread out the cost between lots of people.
For example, if you need $1000, and a hundred people donate $10, you’ve met your goal. Since people donated the money to help you instead of lending it, you don’t have a financial obligation to pay them back.
If you want to try out crowdsourced fundraising, be aware that only one third of campaigns reach their goal. It’s hard to get people to donate money, especially if they aren’t going to get something out of it. Don’t rely on crowdsourcing for your money, as it’s likely to fail, leaving you in the same situation. If you have lots of good friends though, it can be a good solution to ask them for money without ruining relationships by asking for a loan.
Sometimes, the bill is just too much to handle. Especially if something big happens, like a massive medical bill that needs to be paid, there is no reasonable way out. Declaring bankruptcy isn’t a decision to make lightly, and you definitely need to meet with a financial professional before choosing this route.
Declaring bankruptcy is basically telling everybody who has a stake on your money that you cannot pay back debts. Any secured loans you might have, like mortgages or car loans, will be taken by the banks, meaning you might lose your home or car. In some states, the bank will come and repossess other valuable items you might have to help pay off some of your debt.
Bankruptcy does give a person a fresh start with no debts, but it has a host of negative consequences too. First, if you have a good credit score, it will drop significantly. If you have bad credit, it will still drop, but will have less of an impact. That could lead to not being able to get loans or credit cards in the future, reducing how flexible you can be with finances. For more information on how declaring bankruptcy and other factors will affect your score, visit our credit score resource center.
Choosing Your Solution
Picking what is best for you depends entirely on your situation and how much money you need to spend. It’s important to weigh your options as financial crises can often leave a massive impact on your future finances and credit score.
Try to minimize any negative consequences while maximize potential benefits with each. In some instances it’s even to combine multiple solutions, like using a credit card to pay for some of the expense, while asking family for money for the rest. Just make sure any debt you do incur is manageable and won’t cripple you in the future.
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Ben Allen is a freelance content creator and digital marketer who believes in helping small businesses succeed. He spends his free time bragging about his two daughters, eating stuffed crust pizza, and playing video games.
This post was updated December 20, 2017. It was originally published July 25, 2017.