Using a loan to cover unexpected costs

An unexpected expense, such as a boiler breakdown or hefty car repair bill, can be stressful. Not only do you have all the admin to sort out, but you also need to decide how to fund the costs.

In this article, we delve into your funding options and give some inspirational first-hand feedback from our customers.

Getting a loan for surprise situations

While we’d all love to be able to budget for every upcoming cost, sometimes other situations crop up – leaving you footing the bill for something you hadn’t planned for. Here are just some of the more common unexpected costs our customers face.

1. Boiler breakdown

A boiler on the blink is one of the most common unplanned expenses we see here at Novuna Personal Finance. If heating and hot water suddenly stops working, then you’ll need to get it fixed ASAP – with the worst-case scenario being installing a brand new boiler.

2. Car repair bills

Whether you’re hit by unexpected repairs at your next service, or your car restoration project goes over budget, you may need a bit of financial support to get you back on the road.

Some of our customers have used a Novuna car loan to help them access the funds they need to crack on with their latest project.

One of our customers, Simon, told us all about his exciting restoration project on a classic car with a fascinating history. The restoration ended up costing over 10 times the original quote!

3. Vet bills

A high vet bill can make an already stressful time feel even worse – particularly if your insurance won’t cover some or all of the costs.

There are several options available to help you pay for vet bills, including asking your vet about payment plans, turning to a charitable organisation to help, crowdfunding the money, using your savings or taking out a loan to make the cost more manageable.

4. Home improvements

Damaged furniture, a leaking roof, damp problems, broken windows… we could go on. Any issues that impact the safety or security of your home need fixing immediately. If you don’t have enough funds saved up to cover the cost, borrowing the money you need could be a suitable option.

5. Last-minute travel

A well-planned holiday of a lifetime gives you plenty of time to get your finances sorted. However, an urgent family matter or even a last-minute invite to a destination wedding can put a dent in your bank balance if you don’t have time to save up.

Don’t take out a loan to cover day-to-day expenses

There are some things we suggest you don’t use a loan to cover, such as day-to-day bills, a loan to cover job loss or an income gap, business costs or legal expenses.

As a loan requires you to pay interest, you’ll end up paying back more than you borrowed in the first place. So taking out a loan to assist with general living costs could land you in greater financial difficulty in the long-run.

You’ll notice we’re avoiding the word ‘emergency’ throughout this article, too. That’s because taking out a loan can be a big financial decision, and it’s important not to hit that ‘apply now’ button in haste.

Loans come with an obligation to make fixed-rate monthly payments for a set term, so it’s important to make sure you can comfortably afford the repayments every month. Late or missed payments will be recorded on your credit file, which could impact your ability to borrow in the future.

Take a look at the key questions you need to ask yourself before applying for a loan.

Funding an unexpected expense

As a general rule, financial experts suggest you have around three months’ worth of living expenses saved up for a rainy day. This isn’t always the case in practice, though, and having to find thousands of pounds upfront can often be a challenge. You’ll be relieved to know there are lots of different options out there to help you cover unexpected costs.

Don’t panic or end up making a rushed decision. While you might not have loads of time to think, do take a step back and ensure you’ve researched all your options thoroughly.

1. Spend your savings

Using money you’ve already saved up is the most cost-effective way to cover unexpected expenses, as you won’t have to think about interest charges or incurring debt.

However, you may simply not have enough money in your emergency fund – or you might have the funds ear-marked for another future goal instead.

2. Wait until you can pay upfront

Building up your savings could help you save interest costs. There are loads of ways to boost your savings pot – from reassessing your budget and reviewing your spending habits right through to generating extra income from selling non-essential items or making a bit of extra cash from your hobbies.

However, saving up can only work if you can reasonably delay whatever unexpected expense you’re facing.  If you need to get a new boiler or fix your car as a matter of urgency, it simply might not be possible to wait to save.

3. Take out a personal loan

An unsecured loan could help you borrow the money you need sooner. You’ll then make a set number of monthly repayments until your loan is settled.

As loans are typically fixed rate, your interest rate won’t change and therefore your payments will stay the same each month. You’ll know exactly how much you need to repay each month and in total, helping you to manage your budget.

4. Borrow on your credit card

A credit card can help you to cover unexpected expenses quickly, particularly if you already have a high borrowing limit.

However, do be mindful of high interest rates, particularly if you don’t pay off your balance in full at the end of the month or you do not have a card with a 0% interest offer.

Our guide goes into more detail about the difference between a personal loan and a credit card.

5. Spread the cost with retail finance

Retailers and businesses such as boiler providers may partner with a lender like Novuna Personal Finance to power a range of finance options for shoppers. This could allow you to spread the cost over a fixed period of time – much like a personal loan. However, some retailers may offer competitive rates or even 0% interest to support customers. It’s well worth chatting with your retailer or service provider to find out what payment options they offer.

6. Research other borrowing options

Depending on how much you want to borrow and over how long, other borrowing options might be available to you. This could include a secured loan, home equity loan or even borrowing from friends or family. Carefully consider each option and how this will impact your finances both short-term and long-term.

If you’re worried about money, always consult a professional

Managing an unexpected expense can feel overwhelming but you don’t have to handle it alone. Contact a free debt advice charity such as StepChange for confidential support. They’ll help you to assess your budget and explore the various options available to you. Learn more about StepChange’s free debt advice here.