No matter how carefully you plan and how much you have set aside, it's an unfortunate fact that you can't plan for everything. It’s nobody's fault if money gets tight, but when you're in the red and looking ahead at bills or emergency expenses, you need to know what your options are. Two common solutions - the personal loan and the cash advance - will probably come to mind immediately, but which is right for your needs and long-term financial situation?
A personal loan is where you receive a selected amount of money at once to use for whatever you choose. However, a personal loan will need to be paid back with interest. Personal loans are available from banks, credit unions, or other lending institutions. You will schedule the repayment of your loans over terms you and the lender agree on.
One of the advantages of a personal loan is that they have relatively low interest rates (this will vary by the lender so be sure to compare your options). In addition, you normally have a significant amount of time to pay it back. Loan terms are typically arranged over years, though the amount of time will vary based on the size of the loan. This means you receive the whole sum of money upfront and can put off the bulk of the payments until a time when you are more financially stable in the future.
One of its main positives - the repayment length - can also be its biggest problem. Interest accrues over time, and sometimes, it isn't fixed, so interest rates might go up without you being able to do anything about it. The longer you take to pay off a loan, the more interest you'll be paying, so the loan will cost you more and more over time. If you're getting this loan because of unexpected difficulties, you can probably guess why adding even more bills can cause even more future problems. If you find yourself scraping the bottom of your bank account again before the loan is repaid, the lender is just going to smile and add a few more red lines to your troubles.
This is a small loan with a very high interest rate. While some credit card companies offer personal cash advances against your credit, your typical cash advance will come from for-profit businesses. This might include brick-and-mortar establishments near you, which can put cash in your hand right away. The repayment period for a cash advance is usually very short, a matter of weeks or maybe even just a few days.
A cash advance's main feature is its simple, immediate, low commitment. There's very little to negotiate. You know how much money you need, they know how much interest to tack on, they tell you what it'll cost and when it's due, and you get cash in your hand right away. This makes it perfect for emergencies that need to be taken care of right away or small disruptions that you expect to move on from within a few days.
The problem is the high interest rate, full stop. If you want money in your hand today, that costs money tomorrow, potentially literally. If you don't know for sure that you're going to be able to repay the cash advance right away, that high interest rate will add up fast. If the emergency you're trying to take care of takes longer than you thought it would or has more complications you didn't predict, the high interest rate can become a new financial problem right when you can't handle one.
One headache between you and a personal loan might just be your credit score. Unfortunately, many people don't realise they have bad credit until they've been turned down for a loan. There are loan choices for those with bad credit, but they will often come with a higher interest rate, which you are probably trying to avoid. Loans for bad credit often come from for-profit companies, as opposed to banks, and may resemble a cash advance in many ways, but the repayment period will be longer, and you might not receive the loan amount as quickly as a cash advance.
Which option is the solution you're looking for? This will depend on your exact situation, and nobody can decide that for you, but there are some things you should keep in mind. For many, the main determining factor will be how quickly they need the money. For better or worse, emergency expenses often demand a cash advance simply because money is required immediately, and getting a personal loan from a bank can take time, paperwork, and bureaucratic headaches that nobody in an emergency has the attention for.
Given the option, though, another important factor is how quickly you can afford to pay back the money. If you aren't sure you can resolve your financial troubles quickly, a cash advance might become a problem. On the other hand, if you can pay it back quickly and don't want long-term bills hanging over your bank account, a loan might be a larger commitment than you need. Much of this holds even for loans on bad credit. Though a personal loan on bad credit might have a higher interest rate, shopping around carefully could keep this from getting out of control.
Whatever your situation - sudden emergency or temporary disruption, good credit or bad - the best thing you can do is be aware of interest and repayment terms and make plans to resolve this additional debt in the way that suits your financial situation best. Too many focus on short-term needs and accidentally set up long-term situations that create new problems down the road.