The coronavirus pandemic is causing financial stress in millions of households. In the last five weeks alone, more than 26 million workers filed for unemployment. In the meantime, the bills are coming due – everything from rent to property taxes.
All in all, it’s adding up to a cash crunch for some consumers. It might be tempting to reach for a quick source of cash, but even in a crisis it’s best to avoid high-cost products that can make it tougher to find a solid financial footing in the long run, financial experts say.
The first step is to give your finances a quick audit, says Ken Lin, founder and CEO of Credit Karma. This will help you get a grasp on your essential costs, like rent and groceries, and determine where you can cut back. It will also help you figure out how much extra cash you need to tide you over.
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“Create a budget and map out your projected expenses over the next three, six and nine months,” Lin tells USA TODAY. “If you absolutely need to borrow cash, it’s important to assess what options are available to you.”
Avoid products that could add to your financial distress in the long term like the ones below, he says.
Pass on payday loans
Even in the best of times, these products get bad reviews from consumer advocates because of their sky-high interest rates, which often lock consumers into cycles of repeated borrowing. Payday loans are short-term cash advances that typically charge between $10 to $30 for every $100 borrowed, a rate that can equate to an almost 400% APR, according to the Consumer Financial Protection Bureau.
Credit card cash advances
This may seem like a quick way to get your hands on some cash, but it’s not the smartest approach, says Howard Dvorkin, a CPA and chairman of financial-services site Debt.com.
“Most cards charge you a transaction fee, so right out of the gate you are getting hit by a fee,” he adds.
Depending on your card, that fee can range from 3% to 5% of the amount being advanced. On top of that, your credit card company will charge interest on the advance, which is typically higher than your regular purchase APR. And the cash advance starts accruing interest immediately, compared with the grace period that you receive with regular credit card charges, says Matt Schulz, chief industry analyst at CompareCards.
Should you tap your retirement assets?
It might be tempting to dip into your retirement savings, especially after the CARES stimulus package temporarily loosens the rules on hardship distributions. Consumers younger than 59 ½ who have been affected by the crisis can withdraw up to $100,000 of their retirement savings without incurring the usual 10% penalty.
That may be tempting to fix a short-term crisis, but can create longer-term problems, says Credit Karma’s Lin.
“Your money should be compounding in a retirement account, which means it’s only growing over time,” he notes. “So, the money you take out today could have been worth much more decades from now.”
Where best to look for cash in a crisis
Instead of turning to high-interest loans or drawing down your retirement savings, there are other options that can carry lower interest rates and risks, financial experts say.
Coronavirus stimulus aid
Millions of Americans will receive stimulus payments this month, with the Treasury first sending the checks to taxpayers who have included their direct deposit information in their tax filings. Most adults who earn under $75,000 will receive a $1200 check, while married couples will receive $2,400, while each child under 17 will receive $500.
The IRS and Treasury have created a portal where taxpayers can send their direct deposit information, which should help them get the payments faster than waiting for paper checks.
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These loans, typically offered by banks like Marcus by Goldman Sachs and PNC, can offer lower rates than credit cards. Current rates range between roughly 5% to 30% APRs, with lower rates offered to consumers with higher credit scores.
Some credit unions are offering COVID-19 relief loans, which are aimed at helping their members cope with income loss during the crisis.
Often, these loans carry interest rates that are lower than those offered by larger banks. The Navy Federal Credit Union, for example, is offering loans of up to $5,000 for members impacted by the crisis, with an APR of 6%. Other credit unions are offering APRs with 0% interest for an initial repayment period, such as the Northern Credit Union in New York.
Assets other than retirement funds
Some consumers may be overlooking assets that they can sell to raise cash, like automobiles or “toys” like all-terrain vehicles, says Nicholas Yrizarry, the president and CEO of Laguna Hills, California-based Align Wealth Advisors.
“Many families have two, three, four cars,” he notes. “There are so many costs associated with owning things,” like insurance for vehicles.
Likewise, financial experts say you may want to consider refinancing your home or examining a home equity line of credit. While these steps carry fees and can take weeks to complete, it’s another option available to homeowners.
There’s also a silver lining, says Yrizarry: “Rates are really, really low.”
Aimee Picchi is a business journalist whose work appears in publications including USA TODAY, CBS News and Consumer Reports. She spent almost a decade covering tech and media for Bloomberg News. You can find her on Twitter at @aimeepicchi.