What is an emergency loan?
Emergency loans are the urgent cash assistance that you seek from lenders to help meet your emergency and unexpected expenses such as medical treatment, home improvement or car breakdown.
The most common example of emergency loans is an unsecured personal loan.
These loans are processed very fast. You should expect the deposit into your account within a day or two, once your application for loan is approved. However, emergency loans come at higher interest rates than that of other types of loans.
There are different types of emergency loans, each having their own features. At time you can borrow a few thousands of dollars within a few days. While in other cases, emergency loan lenders disburse the loan money on the same day of approval to help you meet your urgent needs instantly.
Who should borrow emergency loans?
If you need cash urgently to meet some urgent, unplanned but unavoidable expenses, you should consider borrowing emergency loans.
Let’s say there is a leakage in your home, rain water is continuously seeping in and therefore your home needs urgent improvement. With emergency loans, you can borrow money to meet the expense towards your home improvement as soon as possible.
Similarly, you might need cash urgently to meet unplanned medical treatment, urgent car repairing, or just to cover a gap in your income – emergency loans can help you meet all such expenses.
What are the different types of emergency loans?
There are many different personal financial options available today through which you can borrow cash assistance in emergency. The most common options are:
- Personal Loans
- Credit card cash advances
- Payday loans
- Title Loans
Personal loans are the most preferred options because personal loan lenders disburse these loans very fast and in some cases on the same day of approval. These loans are also less expensive compared to credit card advances and payday loans.
For example many credit card companies may charge you an interest rate of 16 per cent while the average personal loan interest rate revolves around 11 percent. Moreover a borrower with good credit can expect even lower personal loan interest.
Personal loan lenders take into account your credit score, credit history etc. to evaluate your eligibility and decide the interest rate and the loan amount. These are unsecured personal loans.
Who should borrow personal loans? If you meet the credit requirement of lenders and are able to secure low interest rate on the basis of your credit profile, then you should opt for personal loans.
Credit card cash advance:
If you possess a credit card, you can borrow cash through your available credit card cash balance. Although this is one of the quickest methods to get emergency cash, credit card cash balance comes at very high interest rates and fees.
Who should avail credit card cash advance? This is a good option for you if you are in dire need of cash and can’t wait till you receive money through personal loans. But remember the interest rates and fees can be very high.
Payday loans in America are one of the most popular emergency loans that offer quick cash assistance. These are loans of small amounts for short duration, usually up to your next payday. Despite popularity, payday loans come at very high interest rates and fee but do not require any credit check. Fast approval and disbursal are the key features of payday loans.
Who should borrow payday loans? If you need only a small amount of cash assistance most urgently till your next payday but do not qualify for low interest loans, you should think of payday loans.
Title loans are another category of emergency loans. These are primarily secured personal loans in which you can use your vehicle as collateral for the loan you borrow. That means you provide the title of your vehicle to the lender as a guarantee for the loan that you borrow.
While these loans are easily available, lenders can repossess your vehicle in case you fail to repay the loan within the loan term, usually 30 days. Like payday loans, title loans also come at high interest rates.
Who should borrow title loans? If you can’t borrow other types of loans due to various factors, you can think of title loans. Title loan should be your last resort to borrow small amount of cash assistance. You must have right financial planning to repay within a month.
Advantages and disadvantages of emergency loans
Like other loans, emergency loans come with many advantages as well disadvantages as follows:
|Can use the fund for any emergency expense.||High interest rate and cost of borrowing.|
|Fast & convenient online application process.||May be offered smaller loan amount.|
|Lenders disburse funds very fast, even on the same day you apply.||Damaged credit score in case of default.|
Advantages and disadvantages of different types of emergency loans
|Types of Emergency Loans||Advantages||Disadvantages|
|Personal Loans||Quick access to cash||High Interest|
|No collateral required||High fee|
|Some option of flexible repayment terms||Bad credit is usually not accepted|
|Credit card cash advances||Instant funding||Very High interest rate and fee|
|Payday loans||Most convenient & Fast disbursal||May have highest APR|
|Credit check may not required||Short repayment duration|
|Title Loans||Almost guaranteed funding||High Interest rates|
|Credit check may not required||May lose vehicle in case of default in payment.|
|NOTE: Interest rate for emergency loans depends upon your credit score and credit history. But if all factors are same, personal loans come at much lower interest rate than that of title loans or payday loans.|
How do emergency loans work?
Emergency loans are primarily personal loans. Therefore lenders do not advertise specifically for emergency loans instead they offer personal loans. But in case of emergency, you need to look out for personal loan lenders who commit fast approval and fast funding of the loan amount so that you can meet the emergency.
As soon as you have gotten quotes from different lenders, you should make a loan application to the lender that offers the best rates and terms. At this stage, you might also need to provide your identity and income verification details.
The emergency loan lender immediately on receiving your application assesses your eligibility and decides on your loan application. If approved, the fund is directly sent into your bank account. A good lender manages the complete application process very swiftly.
Beware of Emergency Loan Scams and Traps!
While looking for emergency loans, always remain cautious of unethical lenders trying to scam you or at least try to take advantage of your difficult time. Pay particular attention to:
No credit check: These are easy and convenient for a bad credit borrower but have very high APRs.
Payment terms: Avoid short payment terms. Longer repayment duration gives you more time to pay back your emergency loans. Also such loans do not affect your monthly budget much, as you only pay a small part of the loan at a time.
Upfront fee: Good and genuine lenders do not ask you to pay any advance fee for loans.
State registration: You should only deal with lender who is registered with your state authority. Registered emergency personal loan lenders have to follow all lending rules and regulations of the state.
Emergency loans and the coronavirus pandemic
As you know, COVID 19 or coronavirus pandemic threw the economy out of gear. As a result many people are out of work and need emergency cash assistance. However the good part is that the interest rates have gone down on many types of loans. There are several lenders who are charging competitive rates on personal loans to help people in the times of pandemic.
Many credit unions have come out with focused coronavirus hardship loans for people who have been affected by the COVID 19 pandemic. These are small amounts of loans with shorter repayment durations.
Emergency loans for unemployed
Since its peak at 14.7 percent in April, 2020, unemployment during pandemic has now come down significantly. As of February 2020, there are 6.5 million unemployed people and 2.5 million unemployment claims. Many unemployment options initiated during the pandemic have mostly expired.
If you are unemployed and received federal benefits earlier but feel that the benefits could be stopped or reduced, there are certain loans that you can explore. For example, emergency loans or personal loans can help you meet your day to day living expenses including utility bills, groceries, rent etc.
However if you plan to borrow personal loans when you are unemployed, your eligibility for the same is affected in several ways. First absence of any stable income could affect you eligibility for the loan as well as the term you qualify for. Second, any existing credit card balance or other on-going loans could increase your debt-to-income ratio.
If these factors affect your chance of borrowing unsecured emergency loans, you should plan to take a co-signer who has stable income and good credit. This will improve your chance of getting unsecured personal loans.
How to choose an emergency loan?
When you need cash urgently and desperately, it is quite natural to grab the loan offer that comes with the lowest advertised APR. But remember this may not be the cheapest option for you. It is always advisable to compare the personal loan quotes from different lenders before taking a final call.
Here are a few tips for comparing emergency loans, when you have quotes in hand:
Minimum credit score: A key requirement of good lenders is to have a certain minimum credit score. If you do not meet the credit score requirement, you should ask the lender if co-signers are allowed. A co-signer with good credit score enhances your chance of approval. Also, this way you may be charged reasonable APR.
Fund disbursal time: If you are looking for emergency loans then certainly you want to get the loan very fast to meet your urgent needs. Therefore, check how fast the potential lender can transfer the fund in your account. If it is not fast enough to meet your needs, look for other lenders.
Check for additional fee and overall cost: This should be a key criterion to select a lender. Find out what if the prospective lenders charge fees other than principal balance and interest rate. This is because many lenders may charge one or more of late fees, prepayment charges, origination fee etc. which is deducted from the final loan amount.
Where possible, prequalify: If you think that you may not qualify for a loan due to your credit score but are not sure, look for a lender that offers the facility of prequalification. This way you can find out if you are eligible for a loan through soft credit check. This is important because hard credit check impacts your credit score. Through prequalification, you can find out the loan amount, rates, terms etc. that you qualify for.
Lender’ customer support system: You may not find a lender’s customer support system important in your decision making process when you scout for loans. But in long term, customer support plays important role especially if you encounter issues with your payments or face a financially difficult time. Therefore get into details of lender’s customer support process and read reviews of other borrowers.
What Can I Use an Emergency Loan For?
As mentioned above emergency loans are a type of personal loans. These are mostly no question asked loans. This means the personal loan lenders do not ask you for the purpose for which you want to borrow the loans.
Personal loan borrowers mostly use the loan to meet emergency situations. Some of the most common usages of emergency loans are:
Medical bills: You can use emergency loans to meet unexpected medical emergency for which you are not ready financially.
Utility: This is another common purpose for emergency loans as you do not want any disruption in basis services like electricity, water, phone connection etc. If you fall short of cash, you can use emergency loans to pay for your utility bills. This help you stay current on your bills and ensures that your credit score does not drop.
Payment of rent: If you are falling short of cash to pay for your home rent or mortgage payments, you can use emergency loans.
Funeral expenses: If you do not have adequate cash to pay for funeral costs or other end of life expenses for your loved one, you may consider emergency loans.
Home improvement: If your home demands urgent repairs and can’t wait for home equity loans that offer better interest rates and terms, emergency loans come to your rescue.
Car repair: Machines can breakdown anytime and this is true for your cars also. If you are caught in any such situation and can’t wait for some time, you should consider emergency loans that can help you meet such expenses.
Limitations on usage: Emergency loans can be used for quite a broad range of purposes such as debt consolidation, home improvements, weddings, vacations etc
However some lenders might place restrictions on how you use the borrowed fund. For example you may not be able to use them for post secondary education, business purposes, activities not permitted by law etc.
Therefore it is always beneficial to check the limitations on loans, if any before you make an application.
How to get an emergency loan with bad credit?
If you are not able to qualify for emergency loans due to your bad credit profile or poor credit score, you may think of the following options:
Get a co-signer: A co-signer is someone who helps you qualify for a loan by agreeing to repay the loan, if you fail to repay the loan in time. A co-signer therefore enhances your chance of approval. In such cases, lenders rely more on the co-signer’s credit score than your score while evaluating your application for loan.
Secured personal loan: If you have poor credit score, lenders consider it risky to offer you a loan. However if you offer any collateral for the loan– means offering something valuable such as vehicle, real estate etc. which works as a guarantee against the loan offered to you– it reduces the lender’s risk in offering a loan to you. Therefore they agree to offer secured personal loans quite easily. But if you fail to repay the loan, lenders can repossess the asset that you offered as collateral.
Consider credit unions: There are many credit unions that offer small loans as an alternative to payday loans. Mostly the maximum loan amount offered is $2000 for one to twelve months terms. The interest rate also remains low compared to payday loans.
However these loans are offered only to members of the credit union. If you are not a member, find out the eligibility to apply for membership. These credit unions have flexible qualification especially for bad credit borrowers.
What are the emergency loan alternatives?
Borrowing money has never been easy and cheap, especially if you have poor credit score. However if at all you need to borrow from lenders but do not qualify for emergency loans, consider one of the following emergency loan alternatives:
Loans from family and friends: If you find it difficult to borrow emergency loans, you should consider borrowing it from family members or friends. Remember, borrowing from relatives has its own risks. Therefore set the terms of borrowing in advance to avoid any repercussions at a later stage.
Credit unions: Credit unions are cheap sources of borrowing loans, especially if you have poor credit score. Check if you qualify for a personal loan from credit union. In general, they have flexible lending conditions.
Local nonprofits and charities: You can explore more about grants or interest-free loans from municipalities, local non-profits and charities. Connect with 211 and explain your financial crisis to find out if there is any matching resource for you.
Payment plans: If you are in a financial crisis and find it difficult to pay all the bills in full, you can negotiate for a payment plan. This will reduce your financial burden to a great extent. You can negotiate for a payment plan for your credit card balance, medical bills etc.
Paycheck advances: Check with your employer if they have the facility for paycheck advance. This can be a cheap source of cash.
401(k) plan: If your job offers the facility for 401 (k), find out if you can get a 401(k) loan or take out money from 401(k) for hardship assistance.
Medical repayment plans: If you need emergency loans to meet your medical expenses, find out from the hospital if they can set up a repayment plan.
You can also check for interest free repayment plans with suitable monthly payments. Settlement of medical expenses at a lower amount by paying a portion of the expense up front is also one option that you can explore from the hospital
Where Can I Get an Emergency Loan?
You can borrow emergency loans from your credit card or a payday lenders. However, we suggest you first try to seek unsecured personal loans from the following lenders:
Banks: This should be your first option, provided you meet their requirements. Check out if their credit requirements, income requirements, disbursal time etc. match with your condition and needs.
Credit Unions: These are community bases organizations who have friendly approach towards borrowers with poor credit. Emergency loans offered by credit union vary in terms of loan amount, payment terms etc. but most of them also offer payday alternative loans.
Online Lenders: These lenders offer a variety of emergency loans. Their application process is also very fast and convenient. However as discussed above, compare the quotes and carry out necessary checks before taking a final call. You should be sure that you are borrowing from a reputed online lender who has a secured website.
What’s the next step?
Saving for emergency has always been the mantra. If you have saved for rainy days, use the saving instead of going to emergency loan lenders. However if you have not saved, shop around, compare the quotes on all parameters to find a loan that comes with lowest interest rate and overall cost. Also, borrow only as much as you need and as much as you can repay in time.