Personal Finance

Don't Do These 3 Things Even If You're Desperate For Cash

Even in an emergency, it's important to think carefully about how to get yourself out of a financial hole. Avoid the below 3 missteps as much as you possibly can.

Life has a way of presenting sudden emergencies in your path when you least expect it. Worse, sometimes such a surprise can come at a time when you can least afford it, be it a medical emergency, or a large payment that you can't afford with your current income. The truth is that, no matter how well you prepare, sometimes you just find yourself in a situation where you're in desperate need of cash, fast. However, there are certain things to strongly avoid no matter how much you need money. Here, we discuss a few "popular" ways people try to get cash that just shouldn't be done.

Avoid Payday Loans or Similar High-Interest Lenders

Although a payday loan might seem attractive as a quick source of financial assistance, we advise our readers to stay away from them as much as possible. While an advertised interest rate of 1% may seem low, such rates are actually on a per-day basis, which translates to a 365% annual percentage rate! This is a monstrous cost that can cause great financial pain for those unaware, especially if used repeatedly. For example, if you were to borrow Rs. 20,000 at such a rate right now, you could end up owing more than Rs. 25,000 in a matter of weeks.

Additionally, and as we will discuss below, taking on a large credit card balance isn't a good idea either. Instead, consider getting a personal loan from a bank. One can be obtained from a lender for any purpose, such as to cover an unexpected medical procedure. While some can take up to a few days to obtain, some banks in India provide them as soon as the same day. Most importantly, they are significantly cheaper, with the best personal loans in India typically having annual interest rates in the 10–15% range.

This graph shows different interest rates by credit facility.

Don't Ask Friends or Family to Be Your Guarantor

Some lenders will request a guarantor for a loan. This means that, if you end up not being able to pay your debt in full, the lender can come after the guarantor's money. A lender requests this when it doesn't have full confidence that the borrower has a believable and legitimate way of repaying a loan. In this situation, you could be putting your friends or family at great risk asking them to guarantee your loan. Although it would be a worst-case scenario, you could end up bankrupting them and/or ruining your relationship.

It may be uncomfortable, but a better option may be to simply ask them to lend you money directly if you really need it, as the strict repayment periods of banks are no joke. Friends or family will likely be a lot more flexible in terms of when you can pay them back. What's more, they may lend you money at a low (or even no) interest rate. You might be positively surprised at the support and generosity that you receive from those close to you. Hopefully, you won't need to borrow too much and their generosity motivates you to work hard to repay them in full in a timely manner.

Don't Rack Up A Credit Card Bill That You Can't Pay Off In A Month

Another tempting way of paying for things when you don't have enough cash is getting a cash advance or just racking up a huge credit card bill to postpone your payment until a later date. This could actually be a decent solution if you do it properly since many cards provide excellent rewards. But, the most important rule to abide by when doing so is to spend only as much as you can pay back in full in the next month. If you spend more, the amount you still owe to the bank will start to balloon at an average rate of 41% per year. In theory, this would be far better than a payday loan, but a personal loan is still a better option, as discussed above.

There is a common solution if you already have a big credit card balance. A Balance Transfer is a transfer of credit card debt from one card with a high interest rate to a different one with a much lower interest rate. However, note that the regular (high) credit card interest rate will kick in after the low-interest period, so make sure to repay the debt in the time allotted if you take this route.

Parting Thoughts

Since life is unpredictable, the best way to prepare for the unexpected is to always save and invest as much of your income as you can. Such funds can act not only as future passive income, but also as an emergency fund to help you out of a pickle. Hopefully, this article motivates you to start budgeting more wisely. Even if your rainy day fund isn't enough, don't panic and turn to fastest option, as there are better and smarter ways of financing an emergency when you're armed with the right knowledge.

Dan Grossman

Dan is a Senior Research Analyst at ValueChampion India, focusing on credit cards. He holds a B.S. in Mathematics & Economics from the University of Michigan, and previously worked in the financial services industry at Capital One and Moelis & Company.