There are many times when you can find yourself facing an unexpected expense. You car might break down suddenly, or you may discover damp around your house, or an electrical problem that needs to be fixed immediately. Other problems may occur if you’ve had weather damage to your home, and it’s not something that insurance will cover. Other times, you may just need some extra cash to see you through a financially difficult month. Some ways in which you might try to cover these unexpected expenses might, then, include:
Extending Your Overdraft
This can be a good idea if you know that you have an authorized overdraft limit, and if you’ have an account where you can avoid high charges for occasional withdrawals.
It’s worth being clear with how your overdraft works, and checking interest rates – for example, Natwest allow £100 to be taken out before you start getting charged, and offer 19.89 per cent annual interest thereafter. Other banks might offer cash incentives, and structured payments to ensure that you can use your overdraft from time to time.
Dipping Into Your Savings
If you have a long term savings account that you’ve been paying into for a while, then an emergency expense can be taken care of. This might mean that you lose out on funds being saved up for a holiday or a future purchase, but can also mean that you avoid debt. Be careful, though, as some banks and building societies may charge for withdrawals for some savings accounts, and it may take time to get at your money.
Another option for dealing with financial emergencies is to use your credit card. If you don’t use a credit card regularly, you can take advantage of 0 per cent introductory rates, and can quickly pay off the balance at the next opportunity. Always make sure that you can make the minimum monthly repayments on a credit card if using one for an emergency; otherwise you could end up paying off interest monthly for a significant amount of time.
For emergency situations, you might want to take out a personal loan, either through your current bank or another lender. This can be useful in the short term if you want to avoid high rates of interest and making immediate repayments, but can work out to be more expensive if you’re tied down to a long term payment plan. A personal loan will be dependent on your credit score, and may have to involve using equity in your home as security if you need a loan at short notice. Some current loan rates include 7.9 per cent on loans of up to £25,000 with the Co-Op, and 6.9 per cent from Natwest on loans to £25,000.
If you need a faster loan, though, and can’t afford to go through the process of credit checks and applications, then a payday loan can be a better option. A short term loan of between about £50 and £1000, can be taken out on the same day, and requires you to be 18, employed, and with a UK bank account. You pay back the loan with interest on your next payday. The drawback to payday loans is that they charge very high APR of over a 1000 per cent – this means that you have to be very careful not to incur any additional charges, while knowing that you have the money coming in to cover the repayment.
George Papas is a regular financial contributor to finance websites and magazines. He regularly contributes to sites like World Finance Group and Invest Internals.