Key takeaways

  • Unexpected expenses can be stressful and overwhelming, but having a plan in place can help alleviate some of the anxiety.
  • Options for paying unexpected expenses include payment plans, credit cards, personal loans and home equity loans.

  • To prepare for unexpected expenses in the future, it’s recommended to have an emergency fund and consult with a financial adviser for guidance.

Getting hit with an unexpected or emergency expense can be a heavy burden. If you don’t have the proper funds in place, it can be financially debilitating, whether home repairs or an unexpected medical bill.

Thankfully, there are options when you run into unexpected financial problems. There are financing options — like loans and credit cards — and you may have access to hardship relief or repayment programs. In the case of an emergency, you may not have all the time in the world to slow down and consider every single option in depth, but make sure you’re at least aware of the resources you have at your fingertips.

5 tips for paying unexpected expenses

Here are five options to consider when an unexpected expense comes your way. If you have the abiity and time to do so, consider each option and weigh it against your current situation.

1. Ask about a payment plan

Depending on the type of expense, you may be able to work out a payment plan with the company or institution you are indebted to. If you’ll need to pay a service provider for unexpected expenses, they may have programs that allow you to pay what you owe in weekly, biweekly or monthly increments, with or without interest.

Many medical providers also offer payment plans to make healthcare costs affordable. You can break the amount you owe into small monthly payments that work for your budget. Even better, most medical debt can be repaid without the added interest or fees if you uphold your end of the bargain by making the agreed-upon monthly payments.

2. Put it on a credit card

You could get a 0 percent APR credit card if you have good or excellent credit. These cards come with a promotional interest-free period, typically between 6 and 21 months.

Ideally, you only want to spend as much as you can afford to pay off the balance within the promotional period. Otherwise, you’ll pay interest on the remaining amount once the introductory period ends.

If you’re unable to qualify for a 0 percent APR credit card or would prefer to use another card you already have, be sure to devise a strategy to repay your outstanding balance sooner rather than later. Consider cutting your spending plan to free up funds for extra credit card payments. That way, you won’t spend several months or years paying down the card, and you’ll minimize the interest you pay to the credit card issuer.

3. Consider a personal loan

If you need to get money you don’t have quickly, your best option may be applying for a personal loan. Consider using the lender’s online prequalification tool (if applicable) to determine your eligibility for funding and view potential interest rates before applying.

There are seemingly thousands of loan options to choose from. To prevent getting overwhelmed with the process, know exactly what you need and qualify for before applying.

For example, there are loans for almost anything, including emergency loans. However, these often re-brand personal loans and carry the same interest rates as traditional loans.

Be aware of loans with rates above 35.99 percent and lenders claiming immediate approval without a credit check. It’s common for predatory loans, like payday, point-of sale or title loans, to be branded as emergency loans. These loans often have sky-high rates, almost guaranteed to cause a dangerous debt cycle.

While you can get a loan from traditional banks, credit unions or online lenders, Liz Modesitt, manager of virtual banking with First Bank, mentions that credit unions often boast the lowest borrowing costs.

However, consumers should keep in mind that membership is required before any loan can be established.

This can usually be satisfied by opening a checking or savings account with the credit unit,’ she says. ‘Borrowers will want to consider whether the savings in interest outweighs the added requirements, Modesitt adds.

If you need money fast, online lenders may be the better option. Al Goldstein, CEO of Avant, says that the new wave of online lending platforms is using advanced underwriting methods to accurately factor in risk.

Online lending platforms position themselves as best for consumers “who find themselves in an emergency situation,” Goldstein says. “Applications take minutes to complete and consumers can receive funds as soon as the next business day.”

4. Consider a home equity loan

A home equity loan is another way to cover unexpected expenses, as it lets you convert a portion of your home’s equity into cash. Still, it should only be used as a last resort since it acts as a second mortgage, and you could lose your home if you fall behind on payments.

Most lenders let you borrow between 80 and 85 percent of the equity you’ve built up in your home. Your equity is the difference between what the home is worth and what you still owe on the mortgage and any other outstanding loans against the property.

To illustrate, assume your home is worth $425,000 and your mortgage balance is $295,000. In that case, you could be eligible for a home equity loan between $45,000 and $66,250.

The interest rate on home equity loans is typically competitive, but you’ll need good or excellent credit to qualify. Funds are disbursed in a lump sum and payable in equal monthly installments over a set period.

5. Conduct a financial audit

If a payment plan isn’t an option or you’d prefer not to use debt to pay for unexpected expenses, conduct a financial audit. You may be able to re-work your budget or cancel subscriptions to free up some extra cash each month. Consider the following ideas when combing through your monthly budget and spending habits.

  • Rework your budget in the short term to create more disposable income.
  • Sell items lying around your home that you no longer need.
  • Cancel any extra services or activities for a brief period until you get back on your feet.
  • Put your creative talents to use and freelance to earn extra money.
  • Pick up odd jobs or overtime at work to boost your earnings.

How to plan for unexpected expenses

Rather than let unexpected expenses throw you into a tailspin, you can prepare in advance to handle these types of inevitable events.

  • Establish an emergency fund: Each time you get paid, set aside a small portion of your income in an emergency fund. It’s important to get in the habit of doing this consistently. You can even set up automatic deposits to your savings account each payday. As a general rule, your emergency fund should have three to six months of living expenses.
  • Don’t max out credit cards: Credit cards are not the ideal first choice for covering unexpected expenses. Especially if the card comes with a particularly high interest rate. However, it is important to have this option available for true emergencies — when you do not have any other way to get the cash needed for unexpected expenses. With this in mind, be careful not to max out your credit card, leaving you with no room for potential emergencies.
  • Establish a budget that includes money for unexpected expenses: Creating and following a budget is a good practice. Doing this can help control your impulse spending and allow you to manage money more effectively. A monthly or weekly budget can also be helpful in shielding you from the impacts of unexpected expenses if you build money into your budget to cover such financial curveballs.
  • Increase your credit score: By working on your credit score ahead of time, you can make it easier to access personal loans or credit cards with competitive interest rates should you need to access credit or borrow money in an emergency.

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