Bridging the gap - short-term personal loans

Nation's Business, Nov, 1989 by Paul N. Strassels

Bridging The Gap

It can happen to anyone. While you wait for a sizable check, you face mounting (and usually unexpected) bills. You may be up against the proverbial wall, perhaps because of a medical emergency, or uninsured damage to your home or car, or a college-tuition bill that you can't pay right now.

When you face a classic short-term cash-flow problem, you have to know where you can turn. You know that you cannot ignore the bills. If you do, your credit standing will go down the drain. Fortunately, you have options, some more costly than others.

There's always the quick, short-term loan at your bank, savings and loan, or credit union. It may be an unsecured 30-, 60-, or 90-day personal-signature loan, or a cash advance on your credit cards. You may have a preapproved line of credit available. The interest rates on all of these loans tend to be relatively high, with credit-card cash advances by far the most expensive.

A collateralized loan usually carries a lower interest rate, but it may take longer for you to get the funds with a collateralized loan, because you will have to pledge securities or other valuables. And that takes time.

The classic collateralized loan is the home-equity loan or line of credit. Such loans can be approved quickly, usually within four days, and constitute a prime source of quick money.

Borrowing from your firm is especially good if you work for yourself. In that case, you can tailor the loan transaction to your benefit and the firm's, especially with regard to interest rate and repayment terms. The firm can charge you a bit less than market rate and can spread out the payments according to a schedule that's best for you. Just make certain that the loan is well documented, contains a set rate of interest that conforms to the rate published by the Internal Revenue Service for insider deals, and is repaid according to its terms.

Even if you are not one of the owners of the firm, it may have a policy that allows (or even encourages) employees to borrow from the company for all sorts of needs. There are many advantages to this type of program. Compare all the terms against what you may be able to get otherwise.

If your borrowing needs are short-term, you may want to tap your individual retirement account. Most people have been warned to stay away from their IRAs because that money has been set aside for later years. That's true. But when you need to bridge that infrequent but serious cash-flow gap, an IRA is an alternative to consider.

Say you need $10,000 and you don't have it handy. You can withdraw the cash from your IRA and still avoid trouble with the IRS. There will be no 10-percent premature-withdrawal penalty, and you will not have to pay income tax on the amount withdrawn as long as you deposit the full $10,000 in another IRA within 60 days of the time you receive the distribution. You're allowed one such rollover a year. If you miss the 60-day deadline, however, you'll be roundly taxed and penalized.

What if, after 60 days, you have only $7,000 to put back into the IRA? In that instance, you would be penalized and taxed on only the unremitted $3,000.

A word of warning: Aside from the IRS requirements, many IRA owners have their funds tied up in long-term certificates of deposit, which, if cashed prior to maturity, carry a substantial early-withdrawal penalty. So, withdraw only what you need, try to get the money back within the 60-day period, and leave intact CDs that impose penalties for early withdrawal.

Paul N. Strassels, president of Money Matters Inc., Rapid City, S.D., is a tax-law specialist and financial adviser.