4 ways to prepare for a financial emergency

Measuring tape around dollar bills

You can prepare for a financial emergency even if you're living paycheck to paycheck.

Protect yourself in one or two of these four simple ways and stop worrying that an unexpected car repair or illness will leave you penniless. You'll have a plan to get the cash you need and without having to use an outrageously expensive payday loan store.

Option 1. Join a credit union to qualify for personal loans.

Click here to find a credit union in your area. Most have liberal membership requirements, so it should be easy to qualify for one near you.

Credit unions are more attuned to the needs of working families than most banks, so joining is painless. You won't feel out of place or embarrassed because you don't have a lot of money.

Start with a basic checking account. It won't cost much. Indeed, it's free at some credit unions, especially if you agree to have your paycheck directly deposited in the account, which is a very good idea.

Once you're a member, you can apply for a personal loan if you run out of cash. It only takes a day or two to get the money and we even ran into a few credit unions that allow you to keep an application on file, so if you need a quick loan, one can be processed in a matter of hours.

A growing number of credit unions offer personal loans that are intended to be cheaper alternatives to payday borrowing. For instance, "Stretch Pay" is available through several credit unions in Ohio, and it allows you to borrow either $250 or $500 at 18% for 30 days. There is a small annual fee for the first loan you take out each year, but it is deducted from your loan amount.

Other credit unions may require you to borrow at least $1,000. But most have no pre-payment penalties, so once your bills are paid you can repay whatever you didn't use relatively quickly.

If you need $400 but are paying 20% or more on credit card debt, you could pay off the card with the extra money and repay the credit union at a lower rate. (Just don't run your credit card bill up again.)

There is no standard interest rate on personal loans. They range from 9.99% to somewhere in the mid-teens and maybe more, depending on your credit history. But they are cheaper loans than you can get just about anywhere else and way cheaper than the rate at a payday loan store, where 50% a month is common.

Option 2. Open a checking account with direct deposit.

If you open a direct deposit checking account at U.S. Bank or Wells Fargo and use it for six months, you can apply for a short-term loan of up to $500 to help you through a financial crisis.

These loans, called Direct Deposit Advance at Wells Fargo or Checking Account Advance at U.S. Bank, deposit cash into your checking account upon request at lower rates than you could get from a payday lender.

The loans must be paid back within 35 days. And the amount owed, or a portion thereof, plus a fee, will be deducted from the next direct deposit check that hits your account.

Interest on these loans runs 10% a billing cycle (about one month), which comes to 120% a year. While they are not cheap, they do offer a better alternative to a payday loan.

Option 3. Get overdraft protection for your checking account.

Apply for a credit card from your credit union or bank that allows you to sign up for overdraft protection. That means you can write a check for $200, even if you only have $25 in your account, and the entire amount will be covered.

By linking your checking account to a credit card, the additional money will be considered a "cash advance," which comes with a higher interest rate than regular charges and usually includes a transfer fee of maybe $3, depending on the amount.

Just ask for a credit card with no annual fee, or at least a very small one. (That's more important than the interest rate.) Then leave that card at home so the entire credit line is available if you need to tap it for an emergency.

Many banks and some credit unions offer "courtesy overdraft protection" or "bounced check" protection. This means your credit union or bank will cover a check or two, up to a pre-set amount maybe $300.

It's a more expensive option. You could be charged $20 to $30 per check. And the credit union will then charge you an additional $4 to $5 a day for each day your account is overdrawn.

But if that's available to you and you can't qualify for a credit card -- it's still a cheaper way to deal with an emergency than a payday loan.

Option 4. If you own a home, get a home equity line of credit.

A home equity line of credit allows you to borrow against the equity in your home on an as-needed basis. If you don't use the money, you don't have to pay for it.

The equity in your home is the difference between what your home is worth and how much you owe on it. For example, if your home is worth $175,000 and you still owe $100,000, you have $75,000 in equity. Most financial institutions will allow you to borrow 80% of your equity or, in this case, $60,000.

But you should only sign-up for the minimum -- probably $5,000 or $10,000. This is a safety net in case of emergency, not spending money.

Start by going to your credit union or neighborhood bank and tell them you want to set up a home equity line of credit. Generally, this is done without charge.

You will be asked to fill out papers, of course, but you can start the process immediately.

Once you are approved for the loan you'll get a checkbook or ATM card that allows you to borrow that money instantly. You only pay interest on what you use. The current interest rate on a home equity line of credit is about 8.25% (prime rate), or a little lower. But banks often offer special deals, such as "Equity loans for 1% below prime."

Most home equity lines of credit require you to pay the interest on your debt each month. You can choose to repay as much, or as little, of the principal as you'd like. Most lines of credit charge an annual fee after the first year, but it is generally in the $35 to $45 a year range.

While a home equity loan has many benefits, but it also has two downsides:

If you are always running out of money, get credit counseling.

Counseling is free or relatively inexpensive, and it can help get your credit card, car loan and other monthly bills -- everything except your rent or mortgage -- under control.

A good credit counselor can get creditors to drop late fees and penalties, negotiate a 30-month repayment plan that you can afford, and stop bill collectors from calling your house.

We recommend that you contact a member of The National Foundation for Credit Counseling, the nation's biggest and oldest credit-counseling organization.

To find a member agency near you, go to the NFCC's Web site, click on "Consumer Debt Advice" on the left-hand side of the page, and then on "Member Agency Locator" under "Contact Us" on the second page.

Use the "Zip Code Search" to get a list of nearby agencies. Click on the individual agencies to find everything from fees to office hours. There are free agencies that can help you budget and use the income you have to its best advantage.

Some credit unions also offer free credit counseling. Ask if your credit union has this service, and if you think you could benefit, and most people can, sign up and find out how they can help you.

Please don't enroll in one of those debt consolidation programs or the heavily promoted "non-profit credit counselors," who are really in it for the money. Your money. You've got to avoid them.