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When you need cash in a crisis – to pay for car repairs, an overdue bill, or a trip to the emergency room – you might not be taking the time to think about your financial future.
But knowing how and from whom you borrow could save you money and keep your debt under control.
Before borrowing money from a lender, ask yourself a few questions to better understand your options and the true cost of borrowing. Your wallet will thank you.
1. What are my other options?
Before you turn to a quick lender, browse your options, says Scott Astrada, federal director of advocacy at the nonprofit Center for Responsible Lending.
Can you borrow money from family and friends or from a local religious or nonprofit organization? Will your employer authorize an advance on your salary?
Selling items online or to a pawnshop is also a way to get money fast, Astrada says.
2. How much can I afford to borrow?
If you decide to borrow from a lender, start with an overview of your cash flow.
Check your last three pay stubs to see your average income and add up your monthly bills, says Debbie Murphy, senior housing and credit advisor at Guidewell Financial Solutions, a credit counseling agency. Calculate the difference to see how much work you have left, then find the expenses that you can reduce immediately, she says.
Astrada says understanding your cash flow will also help you estimate the monthly payment you can afford on a loan.
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3. Can I trust this lender?
“When you are in a bind, there is a plethora of financial institutions ready to take advantage of it, which will put you in a worse position,” Astrada said.
Reputable lenders look at your credit rating, credit report, and debt-to-income ratio to see if you can repay the loan. Check your own credit score and report for free before you apply to better understand your chances of approval, says Astrada.
Murphy recommends starting with your local credit union or bank for a loan, as you may already have a relationship of trust.
Many credit unions offer emergency loans starting at $ 500, she says. Federal credit unions offer alternative payday loans, which carry a maximum annual percentage rate of 28%, well below the three-digit average rate of payday lenders.
If you’re considering an online lender, check their Better Business Bureau rating and reviews on other websites, as well as complaints reported to the Consumer Financial Protection Bureau, Astrada says.
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4. What is the real cost of this loan?
The APR of a loan is the total of the interest rate and the initial fees charged by the lender. Use it to compare the cost of your different loan options. The convenience of a quick loan can cost you a higher APR.
“The best way to find the most affordable loan is to shop around,” says Astrada. The loan with the lowest APR for a given term is the cheapest option.
Amrita Jayakumar is a writer at NerdWallet, a personal finance website. Email: [email protected] Twitter: @ajbombay. Nerdwallet is a USA TODAY content partner providing background information, commentary, and web coverage. Its content is produced independently of USA TODAY.
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