How to pay for an unexpected expense when you’re unemployed

The current unemployment rate stands at 6.7% with 10.7 million Americans out of work. Although those numbers are improved from their peaks last April, they are still nearly double their February pre-pandemic numbers (3.5% and 5.7 million respectively).

Losing your job and struggling to pay your bills is bad enough, but it’s even worse if you are facing an unplanned expense. In the wake of the coronavirus pandemic, many people are left with little-to-no room to pay for a surprise expense, such as a medical emergency or a major car or home repair.

If you’re unemployed and facing an unexpected expenditure, getting quick access to cash is a top priority.

How to budget for unexpected expenses when unemployed

Here are the three best options to pay for unexpected expenses if you’re out of work.

1. Take money from an emergency fund
2. Apply for a personal loan
3. Open a 0% APR credit card

1. Take money from an emergency fund

The best way to pay for an unplanned expense is to use money from your fund for emergencies. After all, you created this fund for precisely this purpose. The primary benefit of using your emergency fund for cash is that you will not incur more debt or pay any interest.

Unfortunately, many people do not have this type of fund, or they have already depleted their savings due to the financial repercussions of the COVID-19 pandemic. If you would like to start an emergency fund, consider opening a high-yield savings account with a reputable online bank.

These accounts offer several advantages, including:

• You can earn more interest than with a traditional savings account.
• You can find accounts with no fees and minimum balance accounts.
• Earning high yields may safeguard you from inflation.

2. Apply for a personal loan

Personal loans are another effective way to access quick cash to pay for an unplanned expense. Many lenders offer same-day funding while others may take a few business days to fund.

Generally speaking, there are five different types of personal loans. Typically, you’ll receive one lump sum that you’ll repay in installments over a set number of months. That means you won’t have to worry about coming up with a large sum immediately.

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3. Open a 0% APR credit card

Using a credit card to pay for an unexpected expense is often considered to be the last resort. But you may be able to qualify for a credit card with an interest-free introductory period lasting anywhere from six to 20 months. That may give you enough time to repay the balance without incurring interest, especially if the amount you need is not exorbitant.

If you can pay off your balance before the introductory period expires, opening a 0% APR credit card could prove to be more cost-effective than getting a personal loan, as you’ll avoid paying interest. On the other hand, if the amount you need is greater than what you can reasonably expect to pay back within the interest-free period, a personal loan may be a better choice. Remember, interest rates for personal loans are typically much less than the post-promotional rates with credit cards.

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The bottom line

If you are unemployed and facing an unplanned expense, it’s important to understand your options. Using cash from your emergency fund is your best bet since you won’t take on debt or pay interest. If you don’t have an emergency fund, you can start one by opening a high-interest savings account and making contributions.

Additionally, you have two options to get quick funds for a surprise expense using your credit. If the amount you need is relatively low, you may be able to avoid paying interest by using a 0% APR credit card. If you think you won’t be able to pay off the balance during the introductory window, you may be better off applying for a personal loan with a low and fixed interest rate.

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