Most people fail to think ahead. That means they get caught up in a panic when an emergency arises and, more often than not, end up taking short-term finance at very high rates of interest. This does nothing more than make the emergency worse. So, even though you may already be on the margin and living paycheck to paycheck, there are a few simple steps you can take to save yourself from the pain of these high-priced loans. The first involves joining a credit union. Almost every major city across the US has a credit union and their membership rules are reasonably easy to satisfy, being aimed at working families. Running a basic checking account is free at many credit unions or charged at a nominal level if you have your paycheck paid into the account. With an account in place, you are entitled to apply for a personal loan if a crisis arises. In most cases, approval comes through within one or two days. Some unions allow people to hold an application form on file so that a loan can be processed more quickly. The majority of unions charge around 18% for smaller amounts of short-term finance. The rules for larger amounts varies but the aim is to provide affordable finance to families in need. When other forms of finance can be charging 200% and more interest per year on short-term loans, credit unions are well worth investigating.

If you prefer conventional banks, some offer short-term loans of up to $500 if there is a crisis. You need to read the small print carefully before you sign up. The terms vary. Some banks require you to hold the account for a given period of time before you qualify for a loan, others have penalties if you fail to repay the loan within preset periods of time. Worked out over a year, the interest rates rise above 100% but they are still cheaper than the other short-term loans. Some credit unions and banks allow you to have a credit card linked to an overdraft facility. Under normal circumstances, a check written with inadequate funds in the account will be refused payment. But with the right agreement in place, the unauthorized overdraft will be considered a cash advance on the credit card. This is more expensive than a conventional overdraft but it will give you access to funds you might not otherwise get. Finally, you can search for a company still offering a Home Equity Line of Credit (HELOC) facility. These have become more difficult given the credit crunch and falling property values, but if you do still have a reasonable equity in your home, you may be able to find a bank or finance company prepared to lend. If you are lucky, you should never sign up for a significant amount of money. Go for the minimum amount available. This is only intended as an financial emergency facility to avoid you having to take a payday loan.

It used to be the case that only low income families lived paycheck to paycheck. As the recession strikes deeper into the economy, the problem is spreading upwards through the middle class. The majority of people in the US have no savings and are currently unable to save any money after paying all the bills. If, for any reason, the regular paycheck is delayed or lost – say, through illness or unemployment – people will not be able to continue their lifestyles unless they borrow. This leaves them very vulnerable because, with only unemployment and other benefits available for a short time from the state, existing and all new debt quickly becomes unaffordable. This makes it sensible to plan for a financial emergency. The alternative is panic and decisions taken too fast to ensure they are the right decisions. So now is the right time to sit down quietly and work out what you would do if there was a real emergency. It might be an accident like a fire at home, or a sudden illness or perhaps a family breakdown threatening divorce. Whatever the cause, you should have a plan.

So what should go into the plan? If you have assets, you need to decide what can be sold and what should be kept. Sometimes, you keep an asset like your home because it is necessary as a place to live. Equally, you can sell an asset because it costs too much in maintenance and upkeep. The best plans set a list of priorities. That you fight to keep some assets and aim for the best price you can get for the others. Once the cash starts to come in from this forced liquidation, you now have to decide what to do with the money. Some debts carry high rates of interest. Paying them down as quickly as possible can save you a great deal of pain later on. But you must always look at the big picture. If your current review finds many debts, most with high rates of interest, a good strategy is to try negotiating a consolidation of those debts while your credit score and general finances are in a reasonably good state. If you wait until your income is disrupted, lenders are not going to be so willing to offer you new loans. Packing as many of your current short-term liabilities into one longer-term loan can not only save you money now, but also give you a good buffer against bankruptcy should an emergency occur.

All this to avoid the need to take a payday loan or its high-interest equivalent as a solution to a financial emergency. It’ easy to tell yourself that, should there be a small to moderate crisis, everything can be solved by a short-term loan. The problem with this view is that the costs of these loans quickly run into interest payments of more than 100%. The statistics show that people who take what is supposed to be a bridging loan to tide over for one month end up in debt for ten or eleven months. Having a plan helps you avoid being caught in the debt trap.

There’s a simple rule when it comes to debts. Unless the debt is interest free, continuing to borrow the money is costing you money. If you can earn interest on savings or get a return on other investments, it usually benefits you to pay off the debts and invest your money. Except, if you are overpaying to reduce your debts this can leave you short if there should be an emergency and some lenders dislike people repaying more quickly than they should and charge fees and impose penalties for early repayment. So, applying the general rule, you should always pay off the most expensive loans first. That means those store cards, credit cards and high interest loans you are carrying. Under normal circumstances, mortgage interest tends to be less than commercial loans.

So, for these purposes, let’s assume you have few credit card debts and some savings. What are your options? One is to use the savings to reduce your mortgage debt. This immediately reduces the interest you pay and it will help if you are thinking about refinancing. Property values have been falling fast. In fact, at the time of writing in May 2009, the market has probably not yet bottomed out. That means your loan to value ratio has been falling. Even though you might have had a mortgage for years, you may now find the current balance of the loan is worth more than 90% of the resale value of the property. This will make finding new finance difficult. Even when the ratio is between 80 and 90%, the interest rate is likely to be quite high to reflect the risk of further falls in property values. If you have a capital sum that will lower the amount borrowed, this will make the chances of refinancing at a cheaper rate possible. However, before you pay, make sure you know when the mortgage interest is calculated. You need to ensure you make the capital repayment at a time when you will get the maximum reduction in interest. Also check to see whether there are penalties if you make an early repayment of part of the principal.

The other factor is practicality. Once you pay a lump sum into the mortgage, that money is locked up. If there’s an emergency of some sort, that forces you to borrow all money needed at higher rates of interest. With the current recession in full flow, unemployment is rising fast. It can be worth having some capital set aside to live on should you lose your job or fall ill. In particular, you should have enough to cover your mortgage repayments for six months should your income dry up. So you can save on your mortgage by overpaying installments or paying a lump sum, but it’s not for everyone. Sit down and do the math to see whether it’s really for you. But, if you are looking at mortgage refinancing, having a lump sum to hand makes a very good bargaining chip in both getting a new deal and getting that deal at a low interest rate.