Are you faced with an emergency expense that your savings can’t cover? Knowing what types of emergency loans are available to you is important to ensure you get the funds you need as quickly as possible.
Most emergency loans provide quick cash, and some have long repayment terms and low payments. However, some emergency loans have interest rates as high as 600 percent and must be paid in full within two weeks. Knowing about emergency loans in advance can help you avoid getting into more debt than you can afford in a crisis.
1. Personal loans
A personal loan allows you to receive cash in a lump sum. The repayment period is usually between one and seven years, and is paid off in fixed monthly installments. The main advantage of a personal loan is that you receive the cash on the same day you apply for it, which is useful in case of an emergency.
These are offered by banks, credit unions, and online lenders. The APR on a personal loan with good credit can be less than 8%, making it cheaper than a credit card. However, the APR on a personal loan with bad credit can be more than 30%, making it a pricey option for emergency funding.
Who is a personal loan suitable for?
Borrowers who have good credit, need funds urgently, want a lower interest rate than credit cards can offer, and prefer a fixed repayment schedule should consider a personal loan.
Strong Points
- Quick access to cash.
- Generally, no collateral is required.
- The interest rates are lower and the loan terms are longer than other forms of emergency financing.
Cons
- If you have poor credit, your interest rate will be higher.
- Loan fees and other charges can be up to 12 percent of the loan amount in some cases.
- Repayment options are shorter than mortgage options.
2. Converting credit cards into cash
Credit cards can be a useful tool in emergencies, if used responsibly. Many credit cards offer a cash advance feature that allows you to withdraw cash from an ATM or bank branch in an emergency. Cash advances are tied to your existing card’s credit limit, so no additional credit check is required.
Credit card cash withdrawals are a quick and easy funding option, but they usually come with a higher interest rate than the card’s standard variable APR. Cash withdrawals are limited to a percentage of the card’s limit, a set maximum amount, or both.
There are other significant drawbacks: There is often no grace period, so interest starts accruing immediately on any prepayments on credit, and you’ll likely have to pay a transaction fee of 3-5% of the purchase price.
These fees can add up quickly, especially if you can’t pay the down payment back right away.
Who is suitable for credit card borrowing?
People who have a valid credit card, need a small loan immediately, and can afford the extra fees and interest are ideal for this type of emergency cash.
Strong Points
- You can withdraw funds from any ATM.
- Your existing credit card may already have a cash advance option set up.
- Most advances do not require an additional credit check.
Cons
- High interest rates and fees.
- There are limitations on the amount that can be borrowed.
- Interest begins accruing immediately.
3. Payday loans
A payday loan is a type of instant loan that you can borrow up to about $500, usually without a credit check. Payday loans usually have to be repaid within two weeks or by your next payday.
These types of emergency loans are generally considered very risky, as the average payday lender’s annual interest rate is around 400 percent, according to the Consumer Financial Protection Bureau, and can go even higher.
Short repayment terms and high fees often make it difficult to pay off debt on time, and many borrowers are forced to “roll” their outstanding balances onto new loans, which can result in excessive lender fees and trap them in a cycle of debt that’s difficult to get out of.
Who is a payday loan suitable for?
Payday loans are ideal for people with bad credit who don’t qualify for other types of emergency loans and can repay the entire amount by their next payday.
Strong Points
- In many cases, you can easily qualify without a credit check.
- Fast funding.
Cons
- Very high APR.
- The repayment period is very short.
4. Title Loans
A title loan is another type of emergency loan that allows you to access cash quickly, secured by the equity value of your car. Also known as a “pink slip loan,” this option allows you to borrow between 25 and 50 percent of your vehicle’s current market value.
These loans are short-term loans with repayment terms ranging from 15 to 30 days. Most are lump-sum loans, meaning you pay back the full amount plus fees on the due date. Some title loan providers offer installment plans. You may also be able to get a title loan without a strict credit check.
Unlike other emergency financing options, title loans are secured and require you to use your car as collateral. If you can’t pay off the balance by the end of the loan term, the lender can seize your car as repayment.
Who is a Title Loan Suitable for?
A title loan may be the only option for borrowers who have poor credit but own an unsecured vehicle. Since you risk losing your transportation if you can’t repay the loan, a title loan should be a last resort in dire situations.
Strong Points
- Quick access to cash.
- It’s easy to qualify.
Cons
- If you fail to make loan payments, the lender can repossess your car.
- You must own and have equity in the vehicle.
5. Salary advances
Some employers offer salary advance plans that allow you to receive an advance against your future earnings. Employers that offer this plan may limit the amount and frequency of the advance.
Third-party payroll advance apps, such as Dave and Earnin, also offer cash advances that you pay back with your next paycheck. They usually charge a fee for each advance, and you might be charged a monthly subscription fee or maintenance fee to use the service.
Who is suitable for salary advances?
This is most beneficial for individuals who receive a regular paycheck and require small, short-term loans to quickly meet their emergency financial needs.
Strong Points
- Employee salary advances may be interest-free.
- There may be third-party pay advance apps available.
Cons
- The advance amount will be deducted from your next paycheck.
- Usually only a small amount.
What can I use emergency loans for?
Emergency loans are available for almost any unexpected expense that can’t be paid for with cash, but there are some common emergencies that lead consumers to apply for an emergency loan.
Car repair
Major repairs like replacing an engine or bumper can cost anywhere from a few hundred dollars to $10,000. According to Bankrate’s Emergency Savings Report, only 44% of U.S. adults say they would pay for an unexpected $1,000 expense from their savings.
An emergency loan may be the only way to get your car running again.
Bankrate Tips
Check your car insurance policy to see if it offers mechanical breakdown or gap insurance coverage to cover at least some of the repair costs so you don’t have to go into debt.
Medical expenses
Even with health insurance, recent data shows that U.S. employees will pay $1,735 before reaching their out-of-pocket costs in 2023. If your insurance company doesn’t offer a payment plan and demands immediate repayment, taking out an emergency loan can help you avoid collection actions.
Bankrate Tips
Billing errors are common, so make sure all covered expenses have been handled by your insurance company. Also, ask if there are other payment options available to you, such as discounts or extended terms to pay your remaining balance.
Home Repairs
According to Angie’s 2023 State of Housing Spending Report, the average emergency home repair cost per household in 2023 was $1,667.
Natural Disasters
You might think it won’t happen to you, but more than half (57%) of U.S. adults have been financially affected by extreme weather in the past decade, according to Bankrate’s Extreme Weather Financial Impact Survey. While your insurance may be able to cover the costs, an emergency loan can help fill the gap until your insurance pays out.
Funeral expenses
The sudden loss of a loved one can result in unexpected funeral expenses. Even if you have life insurance coverage, claims can take a long time to process. That delay can leave family members and grieving spouses searching for ways to pay for the thousands of dollars that are the average funeral cost in the United States.
Bankrate Tips
If an emergency loan is your only option to pay for funeral expenses, consider applying for the loan jointly with siblings or heirs so that the responsibility of the loan does not fall solely on you.
How to Choose the Right Loan for Emergency Payments
The right emergency loan for you will depend on a number of factors, including how quickly you need the money and how much you need to borrow. If none of these apply to you, you may want to consider emergency loan alternatives before making your next move.
| Emergency loan type | Better yet | Perfect for this type of emergency bill |
|---|---|---|
| Personal Loans |
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| Credit card cash |
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| Payday Loans |
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| Title Loans |
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Conclusion
Most experts recommend saving three to six months’ worth of expenses for emergencies, and to avoid paying extra interest on loans to pay for emergency payments, try to build up your savings by putting aside extra cash wherever possible.
Keeping your credit in tip-top shape will help you get the lowest interest rates and best terms if you ever need a loan in an emergency.
