You may have heard that Americans saved more than ever in 2020, a fortuitous byproduct of the COVID-19 pandemic that brought multiple stimulus checks from the federal government at the same time that spending on things like travel and entertainment was limited.
But at the start of 2022, fewer than half of us could cover a $1,000 emergency out of savings, according to a survey conducted early this month by Bankrate.
Obviously, savings is the best source of emergency funds. It can even earn interest while waiting to be used.
“Setting up an automatic transfer from a checking account to a savings account for a small amount each pay period is a great way to get started,” says Dana Montgomery, vice president of retail for Arkansas Federal Credit Union of Little Rock. Transferring $40 to savings every two weeks adds up to accumulate $1,040 in one year, she adds.
But if you, like 56% of the 1,000 adults surveyed by Bankrate, would have to look somewhere else to cover a $1,000 hit, some sources are far better and cheaper than others. Here are alternative sources of emergency cash, ranked from free to predatory.
• A Family Member or Friend
Sure, you hate to ask, but someone who loves you might be willing to make a no-interest loan with flexible repayment terms. Or even a gift.
• A Secured Loan
If you have to go to a lender, Montgomery says, a secured loan “should be a first choice.” If you have savings you don’t want to deplete, you could consider using it as collateral for a low-interest loan. Montgomery says AFCU typically charges about 3% more for these loans than the interest being paid on the savings account, so in the current environment that might be 3.5% to 4%.
Another form of collateralized loan is a note secured by property like a car, motorcycle or boat. If you have property of value, you may be able to borrow against it. You might even refinance an existing loan secured by the same property, assuming you owe considerably less than the value. Interest rates will vary depending on the collateral, Montgomery says.
• Personal Signature Loan
This is an unsecured loan — that is, there is no collateral for the lender to take if you default. This is what 4% of the Bankrate survey respondents said they would do to cover a $1,000 emergency expense. The interest rate may be higher than a collateralized loan, but it could be much lower than a credit card with terms that won’t tempt you into racking up even more interest.
• Credit Cards
This is the most common source of emergency money among survey respondents who would not use savings, with 20% saying they would turn to credit cards. Some retailers may offer credit cards with zero interest for a short, defined period — 12 or 18 months, perhaps. This would be a godsend if you can pay the balance in that time.
But if you have an existing credit card with $1,000 in credit remaining, you will likely start accruing interest at an annualized rate of 25% or more. And making minimum payments can be a temptation that can turn your $1,000 expense into an expensive, long-term debt.
• Payday Lenders
“Avoid payday lenders at all costs,” Montgomery stresses. “The rates, fees and terms are not advantageous to consumers and can be described as predatory.”
Notably absent from this list is a HELOC — a home equity line of credit. A HELOC can be an excellent low-interest source of financing, but it’s not where you look for $1,000 in an emergency. Instead, it is a line of credit secured by the equity in your home, which means you must own a home and owe less on it than it is worth. That’s not an option for everyone.
If you do have equity in your home, setting up a HELOC takes about 30 days from application to closing, Montgomery says, and lenders typically won’t set up a HELOC for as little as $1,000. A minimum of $5,000 or $10,000 is common.
But if you already have a HELOC and haven’t borrowed the full amount, the interest rates can be rock-bottom and the interest can be tax-deductible if you itemize your income taxes.
