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Loans

Should you take out a personal loan if you're impacted by the loss of additional unemployment benefits?

Personal loans are one of a couple of different funding options — but they all come with trade-offs.

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Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.

As of Sept. 5, 2021, several federal pandemic unemployment benefits programs have expired, including the Pandemic Unemployment Assistance (PUA), Pandemic Emergency Unemployment Compensation (PEUC) and the $300 Federal Pandemic Unemployment Compensation (FPUC). And while traditional unemployment insurance benefits are still in place, the expiration of these temporary programs may have created a gap in unemployed Americans' ability to cover expenses.

Many Americans are now looking for ways to make up for that loss in order to completely cover their expenses. People often use credit cards to extend their income, but personal loans have become a common way for people to cover a variety of large expenses. In fact, as of 2019 personal loans have become the fastest growing debt category for Americans, and it may be a tempting choice for additional funding.

Personal loans generally have lower interest rates compared to credit cards (your exact rate will depend on your credit score). And there are even lenders out there who will still approve you for a loan if you have bad or fair credit. They also allow you to borrow up to $100,000, which can come in handy if you don't know how much money you'll need to borrow to cover your expenses until you can get a job. Personal loans also have fixed repayment terms, which can give you a longer time to repay the total amount you borrow.

And while origination fees and prepayment fees are common among personal loan terms, some lenders — like LightStream Personal Loans and Marcus by Goldman Sachs Personal Loans don't charge these fees.

However, if you are affected by the loss of additional unemployment benefits and don't have enough money to start repaying the loan, this could wind up creating a tricky situation where you have a large amount of additional debt that you need to pay back on top of your everyday expenses.

So if you need additional funding to cover some expenses, is it a good idea to take out a personal loan to get that money? The short answer is, it's an option worth looking at, but there may be better ones out there.

When searching for a personal loan, it can be helpful to compare several different offers to find the best interest rate and payment terms for your needs. With this comparison tool, you'll just need to answer a handful of questions in order for Even Financial to determine the top offers for you. The service is free, secure and does not affect your credit score.

Editorial note: The tool is provided and powered by Even Financial, a search and comparison engine that matches you with third-party lenders. Any information you provide is given directly to Even Financial. Select does not have access to any data you provide. Select may receive an affiliate commission from partner offers in the Even Financial tool. The commission does not influence the selection in order of offers.

Explore other federal assistance programs first

Figure out which expenses you're having a hard time paying for and consider applying to federal programs that can provide assistance for those hardships. For example, if the loss of additional pandemic unemployment benefits means that you're coming up short for the money you need to pay rent, you might see if you qualify for the Emergency Rental Assistance Program.

Similarly, if you aren't able to afford enough food for yourself or your family, you may consider applying for the Supplemental Nutrition Assistance Program (SNAP).

Your state may also have other programs that offer economic assistance for those who have fallen on hard times. Research these programs too, as they could provide additional support on top of federal benefits.

These government benefits programs may help you cover basic expenses so you can avoid taking on debt you can't afford to pay back. But if you don't qualify for these programs, there are some other options you may consider.

Use any savings you have, even if you have to dip into a retirement account

Before you think about going to a lender and comparing interest rates, exhaust all other savings options you already have. The first place you should look for money is your emergency fund. Experts generally recommend keeping three to six months' worth of necessary expenses stashed away in a high-yield savings account to keep you afloat in the instance of job loss, a medical expense, or surprise home or car repair.

"One of the main functions of an emergency fund is to act as a financial buffer so when things like this happen, you don't have to go into debt or reach into your retirement account to cover expenses," said Alicia Hudnett Reiss, a Certified Financial Planner. "This is why having cash savings set aside is so important."

If you dig into your emergency fund and still need more money, you might consider any other savings you have. This could be your retirement accounts, though borrowing against your retirement fund is often not advised unless your circumstances are dire.

"I don't like advocating for depleting retirement accounts but everyone's situation is different," Hudnett Reiss said. "If it's just for the short-term and you'll only need a little bit of money, it could be an option." But she also explains that if deciding to withdraw money from your retirement accounts to pay for necessary expenses, you should do so with a specific strategy in mind.

According to Hudnett Reiss, you should start by withdrawing original contributions from any Roth IRA's. This is because your contributions — not your gains — to Roth accounts can be withdrawn tax-free and penalty-free, even if you are making the withdrawals before age 59 1/2. This means, you won't be penalized or hit with a tax bill for using your own contributions from your Roth retirement account.

If you don't have a Roth retirement account of any kind, though, you can still consider taking money from a 401(k) account offered through your employer. You may be able to advocate for a hardship withdrawal, which would allow you to make a penalty-free withdrawal if you're under age 59 1/2 (the funds don't need to be repaid but you will have to pay taxes on the amount you withdraw since the 401(k) is a pre-tax account). Just keep in mind, though, that employers are not required to offer a hardship withdrawal, so you'll have to check with the terms of your workplace retirement plan.

Consider putting your expenses on a credit card

If you think you'll need more than just a few months' worth of extra money to stay afloat, you may want to avoid taking too much out of your retirement fund. Hudnett Reiss explains that this is where a credit card might come in handy. But when deciding to take on any form of additional debt — whether that's through using a credit card you already have or applying for a personal loan — you should have a plan for how you'll make payments, especially if you're currently unemployed.

"Generally, you shouldn't be using a credit card to pay for necessary expenses," Hudnett Reiss said. "But if someone has no savings and no access to income, it's possible for them to still use the credit card. You may incur late fees and your balance will continue to grow if you don't pay it off, but the credit card offers some advantages that a personal loan won't."

One of these advantages is a much lower minimum monthly payment. The minimum monthly amount due on your credit card bill each month is typically less than $100, unlike with a personal loan, which has a fixed monthly payment that will depend on how much you borrowed and the interest rate. And as long as you pay the minimum required amount on your credit card bill, you won't incur a late fee.

"Because of this, it may be more manageable to use a credit card to float your expenses," said Hudnett Reiss. "Then once you get a job and start earning an income again, you can stop using your credit card to cover costs."

Another advantage to using a credit card is that, unlike a personal loan, there is no fixed repayment term, so once you start earning an income again, you can work to aggressively to pay down the credit card debt quickly. The repayment term for a personal loan, though, can range from two to seven years.

Just keep in mind that the interest rate on a credit card is often higher than that of a personal loan. According to the Federal Reserve, the current average APR for a two-year personal loan is 9.58%. By contrast, the average interest rate on a credit card is 16.30%, but can be as high as 24%. However, if you use a credit card with a 0% intro APR period, you can make purchases without accruing interest for a certain period of time. The Citi Simplicity® Card, for example, allows you to make interest-free purchases for the first 18 months (after, 14.74% to 24.74% variable). And the Amex EveryDay® Credit Card has a 0% APR offer for purchases made in the first 15 months (after, 12.99% to 23.99% variable; see rates and fees) .

Citi Simplicity® Card

On Citi's secure site
  • Rewards

    None

  • Welcome bonus

    None

  • Annual fee

    $0

  • Intro APR

    0% for the first 18 months on purchases and balance transfers (balance transfers must be completed within 4 months of account opening)

  • Regular APR

    14.74% to 24.74% variable

  • Balance transfer fee

    3%, minimum $5

  • Foreign transaction fee

    3%

  • Credit needed

    Excellent/Good

Terms apply.

Amex EveryDay® Credit Card

Information about the Amex EveryDay® Credit Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.
  • Rewards

    2X Membership Rewards® points at U.S. supermarkets on up to $6,000 per year in purchases (then 1X), 1X Membership Rewards® points per dollar spent on all other purchases

  • Welcome bonus

    Earn 10,000 Membership Rewards® points after you make $1,000 in purchases in your first 3 months

  • Annual fee

    $0

  • Intro APR

    0% for the first 15 months on purchases, N/A for balance transfers

  • Regular APR

    12.99% to 23.99% variable

  • Balance transfer fee

    N/A

  • Foreign transaction fee

    2.7%

  • Credit needed

    Excellent/Good

See rates and fees, terms apply.

Bottom line

The expiration of additional unemployment benefits may leave many Americans in a tricky financial spot, especially if they're unable to completely cover their household expenses without the additional money.

And while there are some other funding options they can turn to — withdrawing from their retirement account, putting expenses on a credit card or even taking out a personal loan — each option comes with its own set of advantages and disadvantages.

There is no perfect option that doesn't have a trade-off; it's important to make sure you have a plan for paying off any additional debt you take on or replenishing any money you borrow from your retirement account or emergency fund.

For rates and fees for the Amex EveryDay® Credit Card, click here

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.