How would you pay bills when insurance and savings fail?
Financial security isn’t something you achieve once and get to forget about. It’s something you need to maintain; it can sometimes change at a moment’s notice, impacting even those with the most robust personal savings. For instance, a car accident can result in medical bills and potential lost wages, in addition to repair bills. And, insurance policies might not cover the costs right away.
When Insurance Payments aren’t Available
A recent Harris Poll survey conducted on behalf of Oasis Financial explored the topic further. The survey found that 73% of Americans agree the insurance claims process can drag on longer than expected. And, when it comes to covering expenses in the event of an unexpected three-month loss of income, the survey found many Americans turn to personal savings (58%), credit cards (39%), and short-term loans (18%).
It’s no mystery why we prioritize insurance and personal savings. Insurance policies are designed to be there when you need them most, and personal savings are easily accessible without requiring a third party. However, when insurance payouts don’t materialize right away and personal savings aren’t enough, a situation may arise where you consider exploring other external funding sources.
Terms to Know
In this unfortunate situation, it’s crucial to find an option that both covers your expenses and protects your long-term financial well-being. National Financial Literacy Month is the perfect time to get educated on your financial options. Here are a few common terms to help you decode potential funding sources.
Annual percentage rate (APR) and loans
APR represents the annual cost of borrowing funds. It includes the loan amount plus interest rate and other costs associated with the loan (transaction fees and late penalties, for example). Any time you open a new line of credit or take out a loan, the provider must clearly show the APR. When seeking a loan, it’s important to both identify the lowest APR and determine whether it’s “fixed” or “variable.” Variable APR loans may reset interest rates throughout the loan term, while rates on fixed APR loans remain consistent.
Acceleration clauses
All loan agreements contain requirements or conditions of repayment. If you violate certain conditions specified by an acceleration clause in the contract, you may be required to pay the full balance of the loan immediately.
Discounted asset sales
Loans offer funding for the promise of repayment plus interest. Discounted sales, on the other hand, offer funding in exchange for a portion of future assets, and they don’t involve interest or debt. For instance, you may sell a portion of a pending insurance claim in exchange for receiving cash right away. Because it’s a purchase of a potential future settlement, there are no monthly payments, hence no credit damage or debt creation (which often result from unpaid or late loan payments). These sales are often conditional as well. So, if the future assets don’t materialize, you don’t owe anything in return. The funding provider assumes the risk.
While we all strive to avoid emergency situations requiring outside funding, a time may come when you need it, and insurance might not come to the rescue immediately. Be sure you’re prepared to evaluate every option.
If you’re going through an emergency situation, such as significant credit card debt, Clearpoint may be able to help. Learn more about our free credit counseling service, and know that our counselors are ready to help you make a plan to achieve financial stability.
Michael Welter
When emergency situations arise and at the worst situation, asking for help from friends and family can sometimes be an option. Asking for delayed payment and making a promissory note will sometimes help.