The Smartest Ways to Get Cash Quick — and What It Will Cost You

Why It Matters

Even if the odds of a surprise cash crunch seem remote, it’s smart to prepare. If you wait until you lose a job or are hit with an unexpected bill, you might pay more in an emergency. The ideal time to act isn’t when you’re in a financial bind, but when you’re not. Here are some options.

Loans or gifts from family — If you have family with the means and willingness to help, you have a few options. The IRS says people should charge their family members some amount of interest. In December, those interest rates were a minimum of 0.48% for loans that will be paid off in between three and nine years, and 1.31% for loans made for longer than nine years. In reality, the tax agency probably won’t focus on most low-dollar-amount loans. Be sure to make it a formal loan, with a regular payment schedule and documentation.

Of course, if a family member will simply give you the money, that’s pretty great. Each parent can give $15,000 annually without using up any of their lifetime federal gift tax exemption of $11.6 million.

Roth Individual Retirement Accounts (IRAs) — If you’re 59 or younger, you can withdraw as much money as you've contributed directly to your Roth IRA anytime, without penalty. (And of course there are no income taxes to pay, since Roths are funded with after-tax dollars.) There are restrictions, however, on taking out anything extra you've earned, which has been growing tax-free. If you withdraw those earnings before age 59 ½, and before you’ve had the account for five years, they may be taxed and you may pay a penalty. You won’t pay the penalty if you use a withdrawal of up to $10,000 for a first-time home purchase, for qualified expenses tied to education, adoption, or a birth, for unreimbursed medical expenses or health insurance if you’re unemployed, and a few other things.

Retirement plan loans — Retirement savings plans like 401(k)s often allow people to borrow from their own accounts. If your plan is one of them, most of the time you can borrow 50% of your balance or $50,000, whichever is less. (You can only borrow against the amount in which you’re fully vested.) Loans are typically for five years, unless they’re being used to buy a primary residence, when it can stretch to 10 years. The interest rate is usually one or two points above the prime rate, which is now 3.25%. But here’s the key thing to remember: You’re paying that interest to yourself, not to a bank.

If you need funds to bridge a short period, a 401(k) loan is a low-cost option. “It’s certainly the easiest thing to do in any year, as long as the borrower is disciplined and pays it back quickly,” says George Gagliardi, a financial adviser with Coromandel Wealth Management.

The downside? You’re taking money out of an account where it can compound tax-free, and if you’re not contributing to the plan you’re not getting any employer match. If you’re laid off, you may have to pay back the loan relatively quickly. If you can’t, it may be considered a taxable distribution and you’ll pay income tax and a 10% penalty if you’re under 59 1/2.

A provision in the CARES Act expanded the size of a loan people could take out of 401(k)s and waived the 10% penalty, among other things, but that option expired in September.

Retirement savings withdrawals — Your 401(k) may also let you take what are called hardship withdrawals. This is money you won't pay back and that you’ll owe income tax on, unless the withdrawal is from a Roth. In most cases, you’ll pay a penalty of 10% of the amount you take out early. Withdrawals must be for “an immediate and heavy financial need” and limited to the money required to meet that need. Possible needs include medical expenses, preventing eviction or foreclosure, tuition payments and the purchase of a primary residence.

A CARES Act provision allows people affected by the coronavirus to take up to a total of $100,000 or 100% from 401(k)s and IRAs without the usual 10% penalty — if the plan agrees to offer the option — and any taxes owed can be spread out over three years. The window for using this with 401(k) plans closes this year. (The rules around what qualifies for a penalty-free withdrawal from an IRA are a bit different.)

If the need for cash is truly short-term and you’re sure a chunk of money will be coming your way soon, the principal in a Roth IRA can be withdrawn and put back without penalty within 60 days.

Home equity lines of credit (HELOC) — A home equity line of credit is usually considered a second mortgage. HELOCs with variable rates are are pegged to the prime rate, and average around 4.5% now. TD Bank advertises a HELOC with a variable rate as low as 3.74% (the prime rate of 3.25% plus 0.49%) — but the fine print says the rate only applies to people wanting a credit line of at least $200,000. (Gulp.) In general, the rate is based on your credit score, debt-to-income ratio and the amount of equity you have in your home. You may get a 0.25% break on the interest rate if you have a checking account with your lender.

People with HELOCs can draw on the credit line as needed, usually over 10 years. During that period, you’ll only pay interest on the amount you tap. After that, you could pay back interest and principal for as long as 20 years.

HELOCs aren’t a quick fix, since getting one can take a month or more. Financial planners like clients to have HELOCs lined up that they can access in emergencies. These use your house as collateral, meaning you could lose your home if you can’t repay. Also, nervous lenders are tightening lending standards now. In April, Wells Fargo & Co. and JPMorgan Chase & Co. went so far as to announce they were suspending new HELOCs.

Refinancing a mortgage — Homeowners who refinance at today’s low rates can free up cash flow, but this is not a quick option. With mortgage rates at record lows, the Mortgage Bankers Association expects refi activity to approach a 17-year high in 2020. Lenders have been swamped. A borrower for a single-family home, with an 80% loan-to-home value ratio and a 740 credit score might pay 2% on a 15-year fixed-rate refi, or 2.625% on a 30-year fixed, according to online loan marketplace Credible. Rising home prices mean people can draw on more home equity — how much your home is worth, minus what you owe on your mortgage.

Tapping a CD early — Money in a certificate of deposit can be accessed before the CD matures, but you’ll usually pay an early withdrawal penalty. The longer the term of your CD, the larger the penalty’s likely to be. On a 1- or 2-year CD, the penalty may range from 60 days worth of interest to 6 months’ worth, while for a 5-year CD you might pay from 150 days to 18 months of interest. No-penalty CDs offer lower rates but allow access to the cash.

Personal loans — Rates on unsecured personal loans range from about 6% to 36%, and loan amounts can be as high as $100,000. What you’ll pay and the length of the loan you can get depends largely on your credit score, debt-to-income ratio and purpose for borrowing. For those with a credit score of 700 or better, there are plenty of offers between 6% and 7%, says Greg McBride, chief financial analyst at Bankrate.com. For the best rate, you may need to allow automatic payments from your checking account. Goldman Sachs’ online bank Marcus cuts the annual percentage rate on its personal loans, which range from 6.99% to 19.99%, by 0.25% for borrowers who enroll in auto-pay, for example.

A big plus of personal loans is that they can be quick — you may have the money in your checking account in 24 to 72 hours. But many financial advisers aren’t fans of the loans. “They are the last resort, I tell clients, other than credit card advances, which are horrible,” says Dennis Nolte, a financial adviser with Seacoast Investment Service.

Personal lines of credit — These are open-ended loans you can tap as needed, usually over 10 years. These are for people with good credit scores, but since they are unsecured loans you don’t get great rates. U.S. Bank’s website offers existing customers credit limits of up to $20,000 at a variable rate that is 10.25%. The rate is indexed to the prime rate — now 3.25% — plus 7%. You’ll also pay 4% on the amount you withdraw, with a minimum fee per transaction of $15 to $20. And the bank can reduce the credit line if it wants.

Some lenders are not accepting new applications for personal lines of credit, or lines of credit secured by savings or a certificate of deposit. One of them is Wells Fargo, which cites the “economic uncertainty created by Covid-19” as the reason on its website.

Credit card cash advances or payday loans — These are far more expensive than personal loans or other options. They may be the only choice if family and friends can’t help, and there aren’t any assets to borrow against. The higher risk of making these loans leads to APRs on credit-card cash advances as high as 36% — and there are fees on top of that. Payday loans, which are usually for $500 or less, are typically due the next time you get a paycheck. Laws around payday lending vary by state, but the Consumer Financial Protection Bureau website says a typical two-week payday loan charging $15 for every $100 borrowed equates to an annual percentage rate of almost 400%.