As many as 70% of U.S. families live paycheck to paycheck, according to Alok Deshpande, founder of SmartPath Financial Education. In fact, less than 30% of families have anything left at the end of the month to put in savings.
About 69% of Americans have less than $1,000 in savings and 34% don’t have any savings at all.
Buying items on sub-prime credit or through high-interest vehicles like payday or title loans can be risky propositions, particularly if you have a low credit score to begin with.
Understanding your options can help ensure you make the best choice to meet your short-term needs without compromising your long-term finances.
Consider the following five options:
1. Cash: Paying cash for a major purchase makes the most sense in terms of avoiding exorbitant fees and preventing credit dings from missed payments. However, cash may not always be readily available.
2. Credit cards: Chances are, even with a shaky financial history, you can find a creditor willing to offer you a line of credit, but you’ll likely have a steep annual percentage rate that accrues each month. Furthermore, if you’re unable to repay more than the monthly minimum, you could end up carrying that debt for years before it’s fully paid down.
3. Employee purchase programs: Research shows that financial stress at home regularly impacts employee productivity at work. This leads many employers to offer an employee purchase program such as Purchasing Power, which allows you to buy what you need through automatic paycheck deductions over a 12-month period. There’s no credit check, zero interest and no hidden fees. There’s also a free financial wellness platform to help with budgeting, credit reports and personal coaching. Learn more at PurchasingPower.com.
4. Rent to own: With rent-to-own products, you pay a monthly principal amount plus service fees and taxes for a period of time, up to completing the rental agreement and owning the item outright. While the monthly rate makes items like appliances and furniture immediately accessible, be wary of the long-term cost. Renters can end up paying as much as three times the retail value of an item before satisfying the terms for ownership.
5. Payday/Title loans: Essentially, these loans function as a loan against a future paycheck or your vehicle. They often come with high percentage rates and fees, as well as extremely short repayment schedules. Rely on these loans only if you are certain you can cover the entire loan and associated fees by the designated due date.
Whatever option you choose for emergency financing, understanding the repercussions can help you long-term.