Cash crisis linked to the coronavirus? Think long term, even for quick financing plans
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The coronavirus pandemic is causing financial strain in millions of homes. In the past five weeks alone, more than 26 million workers have filed for unemployment. In the meantime, the bills are coming due, from rent to property taxes.
Overall, this adds to a cash shortage for some consumers. It can be tempting to find a source of quick cash, but even in a crisis, it’s best to avoid expensive products that can make it harder to find a solid financial foundation in the long run, financial experts say. .
The first step is to do a quick audit of your finances, says Ken Lin, founder and CEO of Credit Karma. This will help you understand your essential costs, like rent and groceries, and determine where you can cut back. It will also help you determine how much extra money you need to help you out.
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“Create a budget and plan your planned spending over the next three, six and nine months,” Lin told USA TODAY. “If you absolutely need to borrow money, it’s important to assess your options.
Avoid products that could add to your long-term financial distress like the ones below, he says.
Transfer payday loans
Even at the best of times, these products receive bad reviews from consumer advocates because of their sky-high interest rates, which often lock consumers into repeated borrowing cycles. Payday loans are short-term cash advances that typically charge between $ 10 and $ 30 for every $ 100 borrowed, a rate that can equal an APR of nearly 400%, according to the Consumer Financial Protection Bureau.
Cash advances by credit card
It might seem like a quick way to get your hands on some cash, but it’s not the smartest approach, says Howard Dvorkin, CPA and president of financial services site Debt.com.
“Most cards charge you a transaction fee, so right off the bat you get hit with a fee,” he adds.
Depending on your card, these fees can range from 3% to 5% of the amount 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 earning interest immediately, compared to the grace period you get with regular credit card charges, says Matt Schulz, chief industry analyst at CompareCards.
Should we draw on our retirement savings?
It might be tempting to dip into your retirement savings, especially after the CARES stimulus package temporarily eased the rules on hardship distributions. Consumers under the age of 59 and a half who have been affected by the crisis can withdraw up to $ 100,000 from their retirement savings without incurring the usual 10% penalty.
It can be tempting to resolve a crisis in the short term, but can create longer term problems, says Credit Karma’s Lin.
“Your money should accumulate in a retirement account, which means it only increases over time,” he notes. “So the money you take out today could have been worth a lot more decades from now.”
Where to best look for money in a crisis
Instead of turning to high-interest loans or dipping into retirement savings, there are other options that may come with lower interest rates and lower risk, financial experts say.
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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 on their tax returns. Most adults who earn less than $ 75,000 will receive a check for $ 1,200, while married couples will receive $ 2,400, while each child under 17 will receive $ 500.
The IRS and the Treasury have created a portal where taxpayers can submit their direct deposit information, which should help them get payments faster than waiting for paper checks.
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These loans, typically offered by banks like Marcus by Goldman Sachs and PNC, may offer lower rates than credit cards. Current rates range from around 5% to 30% of APR, 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 loss of income during the crisis.
Often times, these loans carry lower interest rates than those offered by the big banks. The Navy Federal Credit Union, for example, offers loans of up to $ 5,000 to members affected by the crisis, with an APR of 6%. Other credit unions offer APRs with 0% interest for an initial repayment period, such as the Northern Credit Union in New York.
Assets other than pension funds
Some consumers may overlook assets they can sell to raise cash, like automobiles or “toys” like all-terrain vehicles, says Nicholas Yrizarry, President and CEO of Laguna Hills, Calif., Align Wealth Advisors.
“A lot of 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 considering a home equity line of credit. While these steps incur a fee and can take weeks, this is another option available to homeowners.
There is also a silver lining, says Yrizarry: “The rates are really, really low. “
Aimee Picchi is an economics reporter whose work appears in publications such as USA TODAY, CBS News and Consumer Reports. She spent nearly a decade covering tech and media for Bloomberg News. You can find her on Twitter at @aimeepicchi.