An emergency loan is money borrowed to cover an unexpected expense. Many people take out an emergency loan because they don’t have enough savings to pay emergency bills with cash. According to Bankrate’s Emergency Savings Report, more than one-third (35%) of U.S. adults would borrow money to cover an emergency expense of $1,000 or more.
There are many different types of emergency loans available, including credit cards, personal loans, payday loans, personal lines of credit, etc. Each has its own advantages and disadvantages that are good to know about before you start applying.
What you need to know about emergency loans
If you need emergency cash, there are several types of credit to choose from. The right choice for you will depend on how much you need, when you need it, your financial situation, and your monthly budget.
There are two main types of emergency loans: installment and revolving. With an installment loan, you receive all the funds at once and make fixed payments every month over a period of time. An example of a revolving loan is a credit card. You can use, pay off, and reuse the credit as many times as you need.
Both options provide fast funding, with funds sometimes available the same day you apply.
Emergency Loans: Installment Payment Options
If you want predictable payments, a fixed interest rate, and need to pay all of your funds up front, these installment loan options are worth considering.
Personal Loans
Personal loans are often the go-to option in emergencies, with a relatively simple approval process and the ability to get funds quickly (sometimes as soon as the same day you apply). Interest rates on emergency personal loans are usually fixed, and payments can be spread over one to seven years, giving you more payment options to fit your budget.
Most emergency personal loans are unsecured, which means your eligibility is determined based on your credit score, income, and employment history. If you have excellent credit, you can qualify for loan amounts between $1,000 and $50,000 and interest rates below 8 percent. However, bad credit personal loan lenders may approve borrowers with scores as low as 300, but interest rates can be as high as 36 percent.
Payday Loans
Payday loans are small emergency loans that are tied to your regular paycheck. They allow you to get quick cash if you need up to $250. They must be repaid by your next payday, plus fees, and in some cases the APR can be as high as 400 percent or more. Payday loans are approved entirely based on your paycheck, so there is little to no credit check.
Many states consider payday loans to be predatory, heavily regulate them, and should only be used as a last resort. You may need a payday loan to fix a car you use for work, pay a past-due utility bill, or buy prescription medicine for yourself or a sick family member.
Title Loans
Title loans are a secured installment loan option worth considering if you have a car that you don’t have a loan on. These emergency cash loans usually allow you to borrow between 25 and 50 percent of your car’s value, with a repayment term of 15 to 30 days.
Title loans are easier to get and have lower interest rates than payday loans, but the car you borrow against must meet the lender’s criteria. However, if you can’t repay the loan, the bank can repossess your car.
Emergency Loans: Revolving Options
If you can’t make installment loan payments or don’t need cash right away in an emergency, credit cards and other types of revolving credit are useful. Payments are based on the amount you use, so if you only need to borrow a small amount of your overall credit line, you’ll make smaller payments.
One major drawback of revolving options is that using up your credit card limit affects your credit utilization ratio and can therefore lower your credit score. The more of your available credit you use, the lower your credit score will be. Installment loans do not affect your credit utilization ratio.
Credit card
If you need money urgently, using your existing credit card is a relatively hassle-free option. You can also apply for a cash advance, but they usually have high interest rates and a 3 to 5 percent cash advance fee. You only pay what you use, and the minimum payment is usually much lower than what you’d pay with a personal loan.
Credit card interest rates usually fluctuate and can be significantly higher than interest rates on personal loans. Using most or all of your available credit can lower your credit score because it directly impacts the credit utilization portion of your credit score.
Making only the minimum payment each month makes it easier to get into the habit of carrying a balance. Installment loans require you to pay off the loan within a set period of time.
Personal credit line
A personal line of credit offers the same flexibility as a credit card, but often at a lower interest rate than a credit card. Payments are based on the amount borrowed, and the line of credit can be paid off in full and reused. Borrowing limits are typically $20,000, which is much less than the average personal loan of $50,000.
However, it can be a good option for ongoing expenses like replacing the roof on your home or major dental work.
How to Choose the Right Emergency Loan
If you’re in urgent need of cash, you may not have time to research different loan options — the stress of a broken-down car, a high deductible to pay for emergency medical treatment, or a utility shutoff notice is more at the back of your mind, so being able to quickly compare options is important.
This table makes it easy to see the key benefits of each type of loan.
| Emergency loan type | Might be a good choice |
|---|---|
| Personal Loans |
|
| Title Loans |
|
| Payday Loans |
|
| Credit card |
|
| Personal credit line |
|
What can emergency financing be used for?
The most common uses for emergency loans are for medical bills or repairs, but they can be used to cover almost any expense.
- Medical Expenses: For example, if you or a loved one needs to go to the emergency room and insurance doesn’t cover the full cost, an emergency loan can help cover the out-of-pocket expenses.
- Car repair: No matter what type of car you drive, or how new it is, chances are you’ll need repairs at some point. Unexpected car repair costs can range from $20 to fix a flat tire to $6,000 to fix an overheating engine. If your car repairs will take days or weeks, you’ll also need to consider arranging transportation.
- Home Repairs: Leaking faucets, overflowing toilets, faulty fireplaces, and cracked exterior walls are some of the issues homeowners may face. Luckily, emergency loans can help keep your home in top condition even when your system breaks down. Home repair costs vary widely, but HomeAdvisor estimates range from $4,223 to $25,514.
- Daily billing: If you’ve lost your job, had your hours cut, or are unable to work for any reason, you may need to take out an emergency loan to pay your mortgage or rent, utilities, groceries, and other bills. While monthly payments vary depending on a variety of factors, including the number of people in your family and where you live, the average American family spends $72,967 a year in total expenses.
Conclusion
Some emergency loans are more beneficial to your finances than others, so even if you need money right away, take the time to explore your options to ensure you can get the funds you need without negatively impacting your finances in the long term.
