The CARES Act, passed by the federal government in response to the pandemic, offers several forms of financial assistance to those hit hard by COVID-19. Many Americans can now look forward to stimulus checks and an extra $600 per week in unemployment benefits to help them through these tough times. The new law also enables individuals under 59 1/2 to take penalty-free withdrawals from their retirement accounts and to take retirement account loans that they can pay back over three years without the money being considered a distribution.
Withdrawing funds from your retirement account is certainly better than losing your home or car due to COVID-19, but it's not the best choice for your long-term security. Saving for retirement is tough at the best of times, and withdrawing funds from your retirement account now will only make that more challenging. Here are a few other places you should try to borrow money from before tapping your retirement savings.
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1. Home equity loan or line of credit
If you own your home and you have some equity, a home equity loan is an affordable way to borrow money, especially right now while interest rates on most loans are lower than normal. This is essentially a second mortgage, where you pay the principal plus interest back over a set number of years. You can use the money for any reason, so it can help you cover your basic needs until you're able to go back to work.
Another option is a home equity line of credit (HELOC), which is similar except that rather than borrowing a set sum of money, you're given a line of credit that you can borrow up to if you need it. This gives you more flexibility in how much you borrow, which could be useful right now, but HELOCs usually have variable interest rates as opposed to fixed rates, so it's a little more difficult to gauge how much you'll owe overall.
You may have a more difficult time securing a home equity loan or line of credit if you're out of work, because lenders usually like to see that you have a steady source of income so you can afford to pay back what you borrow. But given the unusual circumstances right now, banks are making exceptions to a lot of the typical rules, including allowing customers to defer payments. So if you have a steady job normally, you might be able to work something out with your bank to get you through until you can return to work.
2. Personal loan
Another option if you don't own your home is to apply for a personal loan. You can use these loans for anything you want, and you don't need any collateral to get approved. They're ideal if you only need to borrow a small sum of money, but you can also borrow up to five figures with some lenders, depending on your credit, income, and other factors.
The lack of collateral that makes these loans appealing to some also makes it a more costly way to borrow. Interest rates are usually higher on personal loans than they are on other types of loans that have collateral. Rates also depend on your credit, with those with lower credit scores paying more to borrow. Interest rates can be as high as some credit card interest rates, but the advantage to personal loans is that you have a predictable monthly payment and you don't have to worry about your balance ballooning out of control.
Usually, you have to be able to demonstrate some type of income to get a personal loan, but some banks might make an exception right now if you have a job normally and enable you to defer payments for a few months. Reach out to the personal loan provider you're considering to see what assistance they're offering to individuals affected by COVID-19.
3. 0% APR credit card
Charging items to your credit card that you cannot pay back at the end of the month is usually not a smart idea, but if you use a credit card with a long 0% introductory APR period, you might be okay. During the 0% APR period, your purchases won't accrue interest. As long as you pay them off before the introductory APR expires, you won't owe any interest on these items at all.
The tricky part is, if you're not able to pay back what you owe in that time frame, your balance at the end of the introductory period will begin accruing interest at the standard rate. This could create worse debt problems for you down the road if you're unable to pay back what you owe. But if you're nearing the end of your introductory APR period and you realize you won't be able to pay everything back, you could try taking out a personal loan, so you have a predictable monthly payment rather than an unpredictable balance that could swell rapidly.
Read the fine print before signing up for a 0% APR credit card so you understand what you're getting. Some 0% APR cards only apply the introductory rate to purchases or balance transfers, not both. You could also lose your introductory rate if you make a late payment. Make sure you're comfortable with all of the rules before you sign up.
Hopefully you can make it through the pandemic without taking on debt, but if you have to, you should think carefully about how you're going to borrow money. Weigh the pros and cons of borrowing from your retirement account and the options listed above to decide which one is right for you.
