COVID-19 lockdowns and social distancing guidelines have put many people in a financial crunch. Whether they are furloughed workers navigating unemployment or small business owners unable to operate, the lack of savings has exposed many people.
There will be many financial lessons to learn as the pandemic subsides, but in the meantime, having money to pay bills and buy essentials is paramount. As the saying goes, CASH IS KING!
The more cash you have, the safer you will feel. Having lots of cash also allows you to take advantage of bargains. Personally, I'm looking to buy real estate from any doomer sellers out there.
So, what are some of the options on the table for people that need funds in a hurry? Let’s take a closer look.
Easy Ways To Access Cash During COVID-19
Part of the reason why alternative methods for getting quick cash are so essential is due to the size of the population with a lower credit score. For perspective, 12% of the U.S. population has a credit score under 550.
Exactly how much a low credit score impacts you is going to depend on where you live. For example, recent laws in California make it so people with a score under 550 have almost no chance of getting funds from conventional sources. In other areas, if you need money over $2,500, there are three types of lenders you can turn to:
- Standard banks (Chase, Wells Fargo, First Republic, Citibank): These have the most stringent requirements in terms of credit. The 12% of the population with low credit scores will be turned away from these banks. Wells and Chase recently announced they will stop approving Home Equity Lines Of Credit (HELOC) and will require a minimum credit score of 700 for new home buyers.
- One Step Below Prime (SoFi, Credible, Upstart): These require credit scores above 600, with higher interest rates that usually cap out at 29%.This way, you tend to get a lower interest rate. You can apply for a personal loan and get real quotes in minutes here.
- Subprime lenders: These products aren’t based on credit, which makes them more accessible, but there are higher interest rates to compensate. We're talking payday lenders with horrific interest rates.
Under this existing model, one would think that there are plenty of options to choose from, but COVID-19 is changing that. Those middle-of-the-road lenders would charge up to 29% interest rate to borrowers, securitize them as bonds, then sell them on Wall Street. If they borrowed at 10% and sold loans at 29%, they would still see a return. However, COVID-19 is causing investors to ditch stocks and riskier bonds.
That leads to a ripple effect where lenders respond to the rising yields by raising credit requirements. Suddenly, those same would-be borrowers on the borderline find themselves out in the cold, with their need for quick cash even greater. So, what are some of the options on the table?
1. Merchant Cash Advance
Statistics show that merchant cash advance services are showing a major spike in usage since lockdown measures started taking hold across the world. This is because these products are designed to service people with poor credit who can’t take advantage of the options above. These serve as advances on your payday checks to get you money right away. To avoid noncompliance with payday lending laws, rather than paying interest, the user can leave a suggested “tip.”
Just note, if you want to go for this option right away, do some research into the providers you are looking for. While there are plenty of legitimate services, there’s also the possibility of scams designed to trick desperate individuals. Look at reviews and coverage of the app or service before you buy-in.
2. Refinancing Your Mortgage
Technically, this isn’t going to put cash directly in your pocket. However, a mortgage is the largest monthly expense for many homeowners. Decreasing how much you have to pay can be a significant financial relief, and with interest rates at historic lows, this is a good time to refinance.
Just know that refinancing a mortgage nowadays is quite difficult. It took me four months to refinance my mortgage and that was right before the COVID-19 pandemic began!
Some of the larger banks have halted applications for refinancing due to market conditions. In others, the restrictions have grown a lot tighter, such as raising the credit score minimum to 700 and requiring 20%+ down. However, if you were planning on doing it anyway, now’s a good time to look into it. Check out Credible to get personalized prequalified rates.
3. Dipping Into Retirement Assets
Normally, this is one of the last things that a financial expert would suggest doing, but if you are in dire financial straits, this may be a potential option for you. Note that if you do decide to go this way, though, there’s a good chance that you may not be able to recoup the full value as if you would if you waited until retirement. While rules are going to be different based on the 401k or IRA that you have, you still want to treat this as a last resort.
The CARES Act has allowed American retirees to withdraw from the 401(k) and IRAs without incurring a 10% penalty. The money needs to be used for difficulties due to COVID-19. A gray requirement given COVID-19 is affecting us all. I strongly encourage folks to NOT pilfer from your 401(k). Keep the money in your retirement account to let it compound over time. Your future retired self will thank you.
4. Selling Unnecessary Assets
If you have items you don’t need or “toys” like ATVs, motorbikes, luxury cars, extra cars or other equipment, these should be some of the first things you look to sell off if you need money quickly.
While social distancing rules may require you to change up your strategy a little bit, it’s still possible to ship these items around and manage the transaction online so you get the money that you need. With any luck, you will be able to replace it later when your financial situation stabilizes.
5. Title Loans
Title loans are designed for people who need help outside of government assistance, like those that have already exhausted their stimulus checks or failed to qualify for a PPP loan for their business.
A title loan allows you to sign over a car that you own outright to a lender. In exchange, they will provide you with a loan for up to 25% of the vehicle’s total value while holding the vehicle as collateral. The reason why this method may be attractive to people struggling with cash flow problems is because you can get the funds you need quickly and with minimal processing fees. Just watch for the high interest rate.
6. Personal Loan, Not Credit Card
Getting a personal loan is something to consider. You can get competitive personalized prequalified rates online through Credible. You want to avoid accessing cash with a credit card due to the high interest rate credit cards charge. See the chart below that clearly shows why getting a personal loan for cash problems is a much cheaper route.
Access Cash Easier During COVID-19
Sooner or later, the lockdowns will end. Eventually, there will be a vaccine for COVID-19. In the meantime, make sure you have enough cash on hand to last for at least 6 months, if not a year.
If you face a liquidity crunch, you can consider one of the options above. Finally, you can always ask to borrow money from friends or family. Just make sure you pay them back, otherwise, you will lose your honor and potentially your friends and family, forever!
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Disclosure: Prequalified rates are based on the information you provide and a soft credit inquiry. Receiving prequalified rates does not guarantee that the Lender will extend you an offer of credit. You are not yet approved for a loan or a specific rate. All credit decisions, including loan approval, if any, are determined by Lenders, in their sole discretion. Rates and terms are subject to change without notice. Rates from Lenders may differ from prequalified rates due to factors which may include, but are not limited to: (i) changes in your personal credit circumstances; (ii) additional information in your hard credit pull and/or additional information you provide (or are unable to provide) to the Lender during the underwriting process; and/or (iii) changes in APRs (e.g., an increase in the rate index between the time of prequalification and the time of application or loan closing. (Or, if the loan option is a variable rate loan, then the interest rate index used to set the APR is subject to increases or decreases at any time). Lenders reserve the right to change or withdraw the prequalified rates at any time.