What is an emergency loan?
Bankrate’s latest 2021 emergency savings survey found that 51% of Americans don’t have enough money saved to cover three months of expenses. The same survey found that one in four respondents had no emergency savings, leaving them financially vulnerable in the event of job loss or an unexpected medical bill.
One option for those who don’t have enough savings for rainy days is an emergency loan. This financing alternative covers your expenses in the event of large and unforeseen expenses. There are several types of emergency loans, but they almost always come with very short terms (usually weeks or months) and high interest rates and fees.
Although you should try to plan your finances so that you have an emergency fund for unexpected expenses, this is not always possible. Sometimes emergencies happen when you least expect them, and an emergency loan may be the only thing available to deal with an even bigger problem.
Why might you need an emergency loan?
An emergency loan usually comes with a short term, sometimes as little as a week or two. They are also usually offered to people whose credit is not perfect. The combination of these two factors means that an emergency loan usually has very high interest rates and fees.
If you can, it’s a good idea to put extra money into an emergency fund before you have an emergency. But if you’re in a tight spot and don’t have an emergency fund, there’s not much you can do at that time. Some situations that might require an emergency loan include:
- Your car breaks down and if it’s not fixed, you won’t be able to get to work.
- Your utilities (gas, electricity and water) may be cut off.
- There is a problem with your paycheck and you are not being paid as expected.
Types of emergency loans
An emergency loan has no strict definition; it’s a catch-all for short-term loans that are meant to be used only in emergencies. Here are some types of loans that could be considered emergency loans.
A personal loan is an unsecured loan that gives you access to a fixed amount of money without any collateral. You then repay it in fixed monthly installments over the term of the loan.
Unlike many other types of emergency loans, personal loans typically have terms ranging from a few months to several years. You can generally use a personal loan for almost anything you want, which can make it useful for a range of emergencies.
Credit card cash advances
In most cases, you use a credit card to make payments directly to a merchant. While this is useful for making purchases at places that accept credit cards, it doesn’t help if you need real money. In this case, you can obtain a cash advance on your credit card.
Be aware, however, that many credit cards charge fees for cash advances AND interest begins to accrue as soon as you receive your money, even before your next statement.
A payday loan is a very short-term emergency loan, usually only a week or two. Payday lenders typically market their loans as being available even if you have bad credit. Payday lenders will give you money now with the promise that you will pay them back with your next paycheck. These loans usually come with exorbitant interest rates (up to 400%) and should be avoided at all costs.
Car title loan
A car title loan is similar to a payday loan, but instead of being unsecured, it’s secured by the title to your car or other vehicle. Using your vehicle as collateral can help reduce the fees and interest you pay since the loan is secured.
The downside of a car title loan is that if you don’t repay the loan, you risk losing your vehicle. It’s an incredible risk and should be avoided unless there are no other options.
How to get an emergency loan
The first thing you need to do to get an emergency loan is to decide what type of loan you are looking for. Depending on your credit score and financial situation, you might consider a personal loan.
Different personal lenders offer loans to people with all types of credit scores. Interest rates and fees vary depending on your credit profile and the amount of money you are looking for. Many loans can be funded in as little as a few days.
Here’s how to get an emergency loan from a personal lender:
- Gather your documents: You will usually need things like your ID, social security number, and proof of income and employment.
- Compare lenders: When evaluating lenders, consider funding timelines and compare quotes by prequalifying yourself, which shows you what you might qualify for before you submit an application. Also read past and current customer reviews to get an idea of the reputation of the lender.
- Fill out the application: Many lenders have fast online applications and give approval decisions the same day you apply.
Emergency Loan Alternatives
Here are some alternatives to an emergency loan you might consider:
- Borrowing against the equity in your home: A home equity loan or home equity line of credit (HELOC) is a loan secured by the equity in your home. These loans usually take a few weeks to set up, so they’re best for accessing longer-term funds.
- Using a credit card: If the emergency you have can be paid for with a credit card, this could be a faster alternative to an emergency loan.
- Ask your friends and family: If you have friends or family with sufficient funds, they may be able to help you. Set clear expectations about how the money will be returned, or you risk damaging your relationship.
How to determine if you need an emergency loan or if you can wait
As the name suggests, an emergency loan is for expenses that cannot be postponed or postponed to a later date. If you don’t have enough emergency savings and need to fill the void with a loan – or if you don’t have any savings to draw on at all – an emergency loan might be the way to go. only viable solution.
Only you can decide if an emergency loan is right for you. Here are some considerations to make when weighing this decision:
- Is the expense urgent? In other words, ask yourself if it’s so urgent that it’s unrealistic to delay spending to save money.
- Is the expense significant? The expense should also be significant. For example, while a holiday sale at a department store might be an urgent event, buying discounted holiday gifts is probably not big enough to take out an emergency loan.
- Can you afford the monthly loan payment? Consider the amount of monthly principal, interest, and fees, and compare that amount to your current budget.
If the scenario you are facing does not answer these three questions, you may want to wait to get an emergency loan. Instead, consider building up your savings fund or going through an alternative option.
Where to get an emergency loan
There is no shortage of emergency loan options. Here are some lenders who can help you with a personal loan when you’re in dire financial straits. These options were selected based on rapid turnaround times for approval and funding.
|Lender||Approval time||Funding deadline||Amount of the loan||Credit score requirement|
|Before||Same day approval||As soon as one working day||$2,000 – $35,000||580|
|best egg||Same day approval||As soon as one working day||$2,000 – $50,000||700|
|Improve||Same day approval||As soon as one day||$1,000 – $50,000||Unspecified|
|Reached||Same day approval||As soon as one working day||$1,000 – $50,000||Unspecified|
The bottom line
An emergency loan is a catch-all loan for people facing short-term financial emergencies. Emergency loans often have very short terms and high interest rates and fees because lenders know that if you are in an emergency you may not have many options.
Try to organize your finances before you face an emergency so that you are prepared. Creating an emergency fund is a great way to put yourself on the path to a strong financial future.