If you are a furloughed government worker, the promise that you will get back-pay once the partial government shutdown ends may come as little comfort.
Unfortunately, even though this loss of income is not your fault, you are expected to keep up with your financial obligations. Otherwise, the consequences may range from damage to your credit rating to eviction from your apartment or foreclosure on your home.
Temporary or part-time employment may provide substantially less income than your usual job. This means you may have to access some cash to tide you over during the furlough, which can force some tough choices. The following are five options, with a rundown of the pros and cons of each.
1. Dip into savings
This type of situation is where having an emergency fund or other reserve of savings can come in handy.
Pros: Dipping into savings is a way to pay your bills with no loan applications or interest charges.
Cons: While you won't be paying interest, using savings to tide yourself over during the government shutdown is not cost-free because you'll be missing out on earning interest on your savings accounts. Also, be sure to replenish your savings as soon as your pay gets caught up or else you may be less well-prepared for the next financial emergency.
2. Borrow against a retirement plan
While most Federal workers have Thrift Savings Plans (TSPs) where withdrawing before age 59.5 carries a 10% penalty and significant tax consequences. Getting a TSP loan may be a problem because workers must be in "pay status" to take out a loan; it isn't clear if furloughed workers qualify as such. But, if you or your spouse own funds in a 401(k), 403(b) or 457(b) plan, you may be able to borrow against your balance in that plan.
Pros: Borrowing from your retirement plan balance means there is no lender that needs to approve your loan, and no interest to pay.
Cons: While these types of plans are allowed to offer loans under tax law, not all plan sponsors choose to provide for them. If you borrow, taking money out of your plan balance for a while could impede your investment growth. These loans have to be repaid on a regular schedule, and if you fail to meet that schedule, the money you took out could be treated as an early distribution from the plan and thus be subject to income taxes plus a 10 percent penalty. Finally, some plan provisions require you to pay off any loan balance immediately and in full if you leave your employer.
3. Get a home equity loan or tap your home equity line of credit (HELOC)
If you own a home with a decent amount of equity in it, borrowing against that equity via a home equity loan or a HELOC is an option for putting some cash at your disposal.
Pros: Because it uses your home as collateral, borrowing against equity is a relatively low-cost form of credit -- "good debt." If you already have a HELOC in place, it is also a source of credit that may already be available to you without having to make a new application. Also, HELOC repayment terms are somewhat flexible.
Cons: If you don't already have a HELOC in place, borrowing against home equity means applying for credit at a time when your finances are compromised. Also, putting your home up for collateral raises the stakes -- if you have trouble repaying the loan, you could risk foreclosure.
4. Apply for a personal loan
A personal loan can be seen as a middle ground between credit card debt and home equity - it can be cheaper than credit card debt without putting your house on the line as collateral.
Pros: According to the Federal Reserve, interest rates on personal loans are currently running more than 6 percent below credit card rates on average.
Cons: If you are in financial difficulty because of the partial government shutdown, this may not be the best time to apply for a personal loan. Also, personal loans usually have relatively short terms, meaning you may soon be facing some pretty hefty payments.
5. Use credit cards to pay for routine expenses
As long as you are not maxed out on your credit cards, you could charge any bills you need to pay while furloughed.
Pros: This source of credit may be easily available, with no further application process. Also, repayment terms are flexible with a relatively small minimum monthly payment, so you can push most of your expenses off until your paychecks start coming again.
Cons: Credit card interest rates make this an especially expensive form of debt. According to data from the Federal Reserve, the average rate charged on credit card balances is 16.86 percent, and it's been getting more expensive lately -- that rate is up more than 3 percent since 2016. Also, if you overtax your credit limit, you might damage your credit score, which could push your interest rate even higher.
Furloughed workers have the sympathy of millions of Americans, but sympathy only goes so far. The above five sources of funds are listed in order from least to most costly. A government shutdown can require you to make some difficult choices to minimize the damage until you finally start receiving your well-deserved pay again; it may be that you tap into more than one of these cash sources to make ends meet.