Whether you lost your job, saw a reduction in hours, or continue to work from home, your daily life has likely undergone a drastic transformation due to the coronavirus pandemic. More still, you’re probablyfielding changes to your financial situation.
While some Americans have managed to sock away more in savings than ever before — the country’s saving rate is at a historical 33% — others are barely scraping by. Either way, people aren’t spending as they used to, even as country-wide lockdown measures loosen and markets reopen.
If you’re struggling to find your feet as the bills pile up, you may be considering borrowing an installment loan right now. But is it always the right answer? Keep scrolling to find out.
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What is an Installment Loan?
An installment loan is a personal loan that grants you a specified amount of money in one lump sum. You’re to repay this money, plus interest and fees, by making multiple payments (or installments) scheduled within a pre-determined time.
Installment loans may be preferable to other emergency financing options because of this repayment schedule. Rather than paying everything back in one lump sum as you would a cash advance or payday loan, you can breakdown your debt over multiple weeks.
Once you complete your final payment, your account closes. If you need more money later on, you’ll have to reapply for an additional cash loan.
When Should You Use Them?
Using an installment loan to keep up with your old spending habits is not a good idea. That’s according to MoneyKey, whose lending specialists recommend installment loans only as a convenient stopgap for unexpected, non-recurring expenses.
Think of the installment loan as a financial parachute when an unexpected emergency takes you off your feet. Pulling it might make sense if your car breaks down out of the blue. An installment loan may float you the cash you need if you don’t have savings to cover its repair on your own.
Installment loans are the wrong financial tools to use when you’re struggling to pay regular, fixed expenses. This problem indicates a deeper financial issue than an installment loan can fix.
Who is Experiencing a Financial Emergency?
Prior to the pandemic, few Americans were ongood financial footing, and the economic effects of COVID-19 only exacerbate these issues.
A new report shows one-third of homeowners have $500 or less in savings. Another study shows 38 percent of Americans would have to sell something or take out a loan to come up with $500. More still, nearly one-third of respondents are earning less than what they did before the start of the pandemic, according to a separate report conducted by Bankrate.com.
If you’re experiencing a crash-crunch like so many others, consider an installment loan as your emergency backup if all else fails. Before you fill out an application, consider the following alternatives first.
Extreme Budgeting
An emergency is a perfect time to edit your budget heavily, slashing unnecessary spending until only the essentials remain. Rent, food, insurances, and utilities make up the necessities that can stay. Everything else might have to go until you get back on your feet.
Now’s the time to unsubscribe from streaming services and other memberships that have monthly fees. While they may not seem like much on their own, they add up over time.
In some cases, you may even need to revise what you spend on the necessities. Plenty of people follow these grocery hacks to cut down on what they spend on food, while others focus on reducing their consumption to lower their monthly utilities.
Communicating
Wanting to conceal the fact you’re experiencing financial issues is a natural reaction. Feelings of shame, worthlessness, and futility can convince you to keep silent, but this strategy will do nothing to alleviate your suffering. It only conceals the fact that you’re facing difficulties.
Although it may take some courage, speak to your creditors about your issues. Creditors would much rather work with you to arrange a payment plan than to watch your account go delinquent. Working together ensures they get some kind of payment.
You may also consider speaking with a free financial counsellor about your options. These professionals can advise you on how to recover from emergencies and share industry resources that may help you tackle debt.
Cashing in Insurances and Investments
If you have assets waiting in the wings, you may be tempted to tap into these investments or policies. You can borrow against your home to receive a HELOC (home equity line of credit) or borrow against the cash value of your life insurance policy. You may even drain some of your retirement savings to cover your immediate needs.
These are all options you should think over carefully. While they promise to put money in your hand, they may have long-term consequences for your finances.
- If you tap into your retirement fund, tax penalties may be waived momentarily, but you’ll have less money for when it comes time to retire.
- If you cash in your life policy, you’ll face larger tax burdens in the next year. The money you take will also reduce the benefits your family receives in case you do pass away.
- If you refinance your home, you’re taking out a loan that uses your home as collateral, which increases your risk of foreclosure or a home lien if you don’t make your payments. Fluctuating interest rates and monthly payments may also be difficult to accommodate.
Bottom Line
The pandemic has affected millions of people, so don’t feel self-conscious if you’re struggling with your finances. Keep that negative feeling out of the equation, and instead, focus on what you can do to weather the storm.
For some people, the answer is in an installment loan; for others, it’s simply a stricter budget. What works for you might be something entirely different. Do whatever fits best for your needs.
