MSU Extension

When a financial crisis occurs, it is easy to be tempted by “alternative” financial service providers or nonbank lenders that promote quick and easy cash. The challenge is that these sources of cash (i.e. pawnshops, payday lenders, car-title lenders, etc.) are often very expensive. Before making a quick cash decision when faced with an emergency, consider affordable cash options.

The Federal Deposit Insurance Corporation (FDIC) suggests the following:

• Build your own emergency or rainy day fund. An emergency savings account can help you be better prepared for those unexpected expenses and can help you avoid having to obtain a loan or borrow from your retirement savings. Financial experts suggest that an emergency savings account should be equal to three to six months of expenses. While this may sound like a difficult savings goal, many people have been able to achieve this over time by making small changes in their spending habits or their banking choices. Another way to achieve this goal over time is to have your paycheck directly deposited into your checking account, with a portion that you allocate going directly into your emergency savings account. It is much cheaper to borrow money from yourself than to borrow it from someone else.
• Be a wise consumer and compare the total dollar costs and Annual Percentage Rates (APR) of loans. It is important to understand the “cost” that you are paying for borrowing money. For example, the Annual Percentage Rate (APR) on a loan includes the current interest rate and one-time fees. Typically Payday Lenders charge $15.00 for every $100.00 borrowed, so if a person cannot pay off the loan in the initial agreed upon time frame and has to extend or “roll over” the loan, it is easy to see how a small loan can become very costly in a short amount of time.
• Check with your bank or credit union to see if you can link your checking account to your emergency savings account. While there will likely be a small transaction fee for this service, it will be considerably less than what a consumer would pay in costly fees and interest for either bounced checks or short-term loans.
• Research other emergency cash options offered by banks or credit unions. Many financial institutions offer small loans, or overdraft lines of credit. The APR’s for these products will be disclosed prior to signing any formal agreements. It is recommended that consumers establish emergency savings credit prior to an emergency, which gives them a better opportunity to secure reasonably priced credit. It is important to note that some banks offer a “bounce protection” plan for a fee that covers overdrafts from checks or ATM/debit card withdrawals. While this service may be helpful for a few overdrafts this service can become expensive the more it is used. Also, this service has a less formal agreement and no APR disclosure.

Being in a financial crisis can be stressful and scary. To be better prepared for financial emergencies, start an emergency savings account immediately, compare loan products and APR’s, consider linking your checking account to an emergency savings account and secure reasonably priced emergency lines of credit before a financial emergency. These helpful tips can reduce the amount spent on fees and interest when seeking quick cash.

For additional financial resources, including education programs visit Michigan State University Extension. To learn more about overdraft and bounced check fees view the brochure Protecting Yourself from Overdraft and Bounced-Check Fees. If you’re wondering about your financial health, take a financial health survey from MI Money Health to get your financial health score! It's confidential and your answers never connect back to your name. This survey can help you evaluate your current financial situation, provide ideas on how you may improve your financial health, and connect you to resources in your local community.