Cash Advance Loan Advice

(?) QUESTION:

My sister and I both have run up against some tough expenses lately. Both of us work hard, pay our rent and even save money at our jobs through our 401K programs. But she had a car accident and it cost her $1000 after the insurance company covered its part, and I had a medical emergency that set me back $800 in pharmaceutical and therapy costs (not covered by my medical insurance).

I think when you’re out of cash and need to pay your rent or make a car payment, you have to dip into your 401K. But she says it’s a better idea to get a cash advance loan from one of those payday loan stores. What do you think?

(!) ANSWER:

You’re both lucky to have each other to share your challenges with. One of the most important things for anyone to have in stressful times is someone to talk to. Notice how in that conversation you came up with two ideas for managing your money problems. If another person just holds it in to his or herself they might get stressed without finding any solutions.

Let me address both your ideas one at a time:

Borrowing from your 401K. The government now allows some borrowing against your retirement savings account at work if for home-related crisis, such as to forestall a foreclosure. But note that other kinds of borrowing will penalize you about 10% off the value of the loan in tax payments, plus add that to your income for this year. This is money you will probably need years from now, when you are entering your retirement (age 59 ½, or later). If you instead leave $1000 in that account for, say, 20 more years, it will be much bigger then, accumulating value if the stock market continues doing what it has done for the past 60 years. Another disadvantage is in the time delay – you need to call the company managing your funds, request a distribution, then wait for the check to arrive in the mail, after which time the check has to clear.

Borrowing with a cash advance loan. This is available only to people with jobs, as the lender bases the loan entirely on your ability to pay it back from future income. There are interest charges and application fees, of course. And if you fail to pay it back on a good schedule – say the next one to three paychecks – you will pay more. But it has no tax implications and it’s a relatively quick means of getting cash when you need it.

Note that with payday loans, you can go with storefront lenders or search online for the right lender with the right terms. Both are a bit time consuming, but if you use a shop-for-you website (sometimes called aggregators), they can help you sort through which cash advance loan company has terms that you can best manage.

The aggregator website that works very well is Month-Payday-Loans.com (US residents can take 3, 6, 12 month loan up to $1000-$5000). You simply go to the site, input your preferences for type and size of loan, and it makes recommendations on which lenders might be right for you. The terms of the loan matter – it’s about more than just interest rates, but instead includes late payment penalties, options to spread out repayment schedules, etc. – so it makes sense to shop around by whichever method you choose.

Of course, there is the other end of the cash flow equation and that includes what you’re spending your discretionary income on. Major corporations cut back expenses when their revenues are restricted. It would be smart for many individuals to do the same thing. It not only reduces the money pressure in your life by reducing overall expenses, it opens up new doors: you might enjoy books from the library instead of movies on TV. Just some suggestions.