6 Ways to Pay for Unexpected Expenses

Quick Answer

You can pay for unplanned expenses using a low-interest credit card or personal loan. Other options include getting a payroll advance or borrowing from your retirement plan or life insurance.

A man wearing a blue shirt has a surprised look on his face as he looks at a document.

Unexpected expenses are an unfortunate part of life. Ideally, you have an emergency fund to help cover unexpected expenses. But, if not, you're not alone. The Federal Reserve reports that just 39% of Americans would struggle to pay for an unexpected expense of $400 or more.

If you're in a financial crunch and need money immediately, you have options. Let's take a look at several things you can do right now to cover an unexpected expense and prepare yourself for financial emergencies in the future.

1. Use a Credit Card

Using your credit card to cover emergencies usually isn't a great idea. With the average credit card interest rate coming in at 16.4% as of November 2021, according to the Federal Reserve, a sizable unplanned expenditure could leave you with high-interest debt that grows over time. If your emergency fund isn't where you'd like it to be, wise use of a credit card can help you weather the storm.

With good credit, you may qualify for a credit card with a 0% APR introductory period ranging from six to 21 months. That might be enough time to pay off your expense and avoid interest charges altogether. Bear in mind, the interest rate will jump to the card's ongoing interest rate once the introductory period expires and will apply to any remaining balance.

2. Get a Personal Loan

If the amount you need for an unexpected expense is higher than you can reasonably expect to repay within the interest-free period, a personal loan might make more sense. With a personal loan, you'll typically receive one lump-sum payment you'll repay in fixed monthly installments for a specific period of time.

You may be able to get a personal loan with a lower interest rate than you typically see with credit cards. The average interest rate on a 24-month personal loan is 9.38%, according to recent data from the Federal Reserve. Overall, personal loan rates can range from 6% to 36%, depending on the lender and your creditworthiness.

Personal loans can help you get through a tough spot with fast access to the money you need. Funding times vary by lender, ranging from same-day to several business days to receive your money.

3. Request a Salary Advance

A payroll advance from your employer could help if you're financially squeezed. A salary advance is when you receive an advance from your employer that you repay through payroll deductions from future paychecks. You must pay back the advance within a specified time period, according to your company's salary advance policy.

Generally, the policy also sets interest rates and loan terms that are the same for all employees, regardless of their credit score. Payroll advances are a much better option than payday loans, which come with high fees and restrictive terms.

Early payday apps offer another way to access income from your job before your normal payday, and they are a safer option than payday loans.

4. Borrow From Life Insurance

If you have a permanent life insurance policy, such as whole life, universal life or variable universal life, you may be able to tap into your policy's cash value.

The best part is you may be able to withdraw the money from your policy without paying taxes on it, as long as you don't take out more than the amount you've paid in premiums. Taking out more than your account's cash value could lower your death benefit and that amount is taxable.

While you are under no obligation to pay back a life insurance loan, the loan does come with interest rates—typically ranging from 5% to 8%—that accumulate until the loan is paid off. If you die before the loan is paid off, any leftover loan balance is deducted from the death benefit.

5. Borrow From a Friend or Family Member

While this option isn't available to everyone, tapping someone close to you for help in a pinch can be a good option. If you know someone with means, they may be willing to lend you money to get you through a rough financial patch.

If you're not careful, though, borrowing money from someone you know can hurt your relationship. Don't pursue this option unless you're confident you can either repay them in full or work out another type of arrangement (maybe you agree to mow their lawn or babysit for a few months, for instance).

Writing up a formal loan contract—also called a promissory note—could make you a more appealing borrower and reassure your "lender" that you're serious about paying them back. It can also give them legal recourse if you fail to repay.

6. Borrow From Your Retirement Account

Borrowing from your 401(k) or Roth IRA may help you cover unexpected expenses, but you should only consider it as a last resort. When you withdraw money from your retirement plan, you're missing out on an opportunity to earn interest on that money and possibly making retirement goals more difficult to reach.

You can withdraw money without paying a penalty or tax if you've contributed to a Roth IRA for at least five years since those contributions are made with after-tax dollars. However, you must pay a 10% penalty and income tax on the money you withdraw from a traditional IRA or 401(k) if you're under age 59½.

Preparing for Unexpected Expenses in the Future

Unexpected expenses can wreak havoc on your finances if you're not careful. The best way to handle these events is to prepare for them in advance. Here are some practical ways to prepare for unplanned expenses:

  • Build your emergency fund. Fund an emergency savings account with enough money to cover at least three to six months' worth of living expenses that can help you endure a financial emergency. If saving six months of expenses is a stretch, get the ball rolling with a smaller goal, such as $1,000, to give yourself a good buffer against hard times.

    Remember, you should only tap into your emergency funds when it's necessary. For example, you might consider accessing your savings when an unplanned expense requires immediate attention and there's not enough time to save the amount you need. Withdrawing emergency funds is also appropriate if not using your savings would substantially disrupt your life.

  • Create a budget. When a financial emergency strikes, you may not be thinking clearly. Having a budget plan in place can help you minimize stress by providing clear direction you can rely on during a crisis. Your budget should include a list of expenses you can trim or do without in a pinch. There are many different ways to budget, and finding the method that works for you can make it much easier to stick to one.
  • Cut expenses. Your budget can help you understand where your money is going. Look at your budget to spot expenses you can cut to put extra money toward your emergency fund instead.
  • Increase your income. Ask your employer for a raise or consider taking a second job to earn extra income. Many side gig options are available, from rideshare driving to tutoring online. You might not get the cash as fast as you need it, but it's a way to get money without paying for it.

The Bottom Line

Paying for unexpected expenses can be stressful and nerve-wracking. It's comforting to know you have ways to come up with the money you need. Consider getting a cash advance or using a 0% intro APR credit card. Also, explore opportunities to borrow with a personal or life insurance loan. No matter which path you choose, fortify your emergency fund and take other preparatory measures to help you cover a financial emergency in the future.

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