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What’s best emergency loan?

Here are some things to consider:

When hard times hit, money gets tighter. Sometimes it runs out. The answer often is to borrow.
So which loan is best?
Generally speaking, the best choice is to borrower from family and friends. Besides keeping convenient banking hours, they are usually more forgiving on loan rates and late payments. But the more conventional choices--- credit cards, 401 (k) loans and home-equity loans are not so clear-cut. Each has its risks. In the worst case, these loans can leave you mired in debt, trigger taxes and penalties or even lead to losing your home.

To illustrate the issues you should consider, we asked financial planner Bill Urban, a partner in the Menlo Park, California, office of Bingham, Osborn & Scarborugh, to compare the costs you would incur over the next three years by borrowing $10,000 from each of these loans. Here’s an over-view.

Credit cards
Pro: They’re easy to tap. You can make minimal payments on the monthly balance. And they’re unsecured, which can put the lender at the bottom of the list if you must file for bankruptcy.
Con: They’re so easy to tap you can quickly get yourself deep in debt. They charge interest rates that commonly urn twice as high as home equity and 401(k) loans. Those small monthly payments stretch our payments- and cost you much more in the long run.
Bottom lines: $3,609. Plunking down $10,000 on a credit card is the most expensive option. By paying 3 percent of the balance each month at 16 percent interest, you’d pay more than $3,600 in interest over three years. But that’s not the end of it. You’d still owe nearly $5,500 of the original $10,000 debt.

Home-equity loans
Pro: Interest rates have plunged in recent months. The average home-equity loan charged about 8 percent, while lines of credit had plunged to just over 6 percent in mid- October, according to Bankrate.com. You generally can take a tax deduction for the interest you pay. Payments often can be flexible.
Con: Falling real estate prices erode your equity. If you borrower too much and home values sag, you could wind up owing more on your loans than your home is worth. The loan is secured by your home, so the stakes are high if you default.
Bottom line: $1,514. This is the least expensive option we evaluated, largely because the interest is deductible. We assumed you’d make no payments for three years, and then pay off the loan. During that time, you’d ring up $2,329 in interest, but you’d get to write off$815 on your taxes if you pay a combined federal and state marginal tax rate of 35 percent.
“It’s nice to know the interest is deductible,” said Jim Seidel, an editor of RIA’s Federal Taxes Weekly Alert. “But if you’ve been laid off and you’re not sure about your ability to repay your loan, you don’t want to lose your house”.

401(k) loans
Pro: Interest rates are low, typically the prime rate plus1 percentage point. There’s no credit check. You borrower from yourself.
Con: The real cost of a 401(k) isn’t the interest you pay. It’s what you could have earned on your money by investing it in stocks and letting it grow tax-differed. So, solving today’s problem could have repercussions when you retire, especially if your cash crunch disrupts your savings habit.
Second, your interest payments face income tax twice: when you earn them and when you ultimately withdraw that money from your 401(k). That’s almost $400 in our example.
But the biggest risk is something outside your control. A layoff. If you lose your job, you must either roll over the loan to a new 401(k) or pay off the balance of the loan. If you can’t scrape up the cash in time, you accelerate the income tax n the balance and trigger early-withdrawal penalties (federal, 10 percent)

“You’re facing Armageddon-type payments” said David Wray, president of the Profit Sharing/401(k) Council of America.
Bottom line: $1,666 or $4,175. It depends mainly on how secure your job is. If everything goes smoothly, the $1,666 in forgone investment returns and eventual income tax compares favorably with a home-equity loan. But if you were let go after one year and couldn’t prepay the balance, you’d trigger nearly $3,300 in taxes and penalties.

“That’s horrendous”, said Urban. “You’re already financially strapped. You have bills to pay. And on top of everything else you have this demand to pay back the loan in 60days. That’s the worst thing you need when you lose your job”.