Image courtesy of Getty Images, Illustration by Hunter Newton/Bankrate
The benefit of an emergency loan is that you can get cash quickly if you are faced with an urgent and unexpected expense. Many borrowers choose personal loans in emergencies because they are easy to qualify for and provide quick access to funds.
Though a convenient source of financing, bad credit personal loans also come with drawbacks, such as fees and high interest rates. Emergency personal loans can be a lifesaver in times of trouble, but relying on one without changing your spending and savings habits can also worsen your financial situation.
Benefits of an Emergency Personal Loan
Choosing a personal loan for an emergency comes with a variety of benefits, from faster funding times to a completely online experience.
Rapid Funding
Most personal loan lenders offer fast approvals, even the next day, and some lenders, like LightStream, even offer same-day financing if you apply early that day, so you can get your car fixed early or pay for that root canal at the dentist.
Simple Qualifications
Most personal loans are unsecured debt, so approval is based primarily on your credit score and income stability, which means less documentation is required, which can be a welcome benefit in an emergency.
Stable fixed interest payments
The interest rate on an emergency loan is fixed, so you don’t have to worry about interest rates changing like you would with a credit card, and once you sign the final paperwork, you’ll also know when your payments will start and end.
Longer repayment options
Having a one to seven year repayment period for unexpected bills gives you more payment options, which can be a great relief if you’re still recovering from a medical emergency or are off work because your car is being repaired.
Accessibility
You don’t need perfect credit to get approved for an emergency loan — you may be able to qualify with a score as low as 300. Bad credit loans have a high APR of 36 percent, but it’s still much cheaper than the 400 percent APR of payday loans.
Limited impact on credit
Unlike credit cards, personal loans are installment loans, and borrowing from them doesn’t affect your credit utilization ratio. Your credit utilization ratio is based on the amount of your total revolving credit that you’ve used, and doesn’t take into account installment loans.
Disadvantages of emergency personal loans
Despite the flexibility and short funding timeline of emergency loans, they also have drawbacks that you should be aware of before applying.
Fee
Lenders may charge fees as high as 12 percent of the loan amount, some lenders may impose early repayment penalties, and some lenders may charge late fees, overdraft fees, and other fees.
No payment flexibility
You can’t pay less than what’s stated in your loan agreement. Once you choose your repayment term, you’re locked in that term until it ends or you refinance.
High Interest Rates
If you have a very low credit score, you may pay a higher interest rate than you would with a credit card. Read the fine print: Some alternative payday personal loan lenders may charge triple-digit APRs.
A stable income is needed
Most personal loans are unsecured, so your income must be consistent to be approved. If your seasonal, tip, or commission income fluctuates significantly, you may not qualify.
It could be a bridge to bad savings habits
Consumers often turn to emergency personal loans because they don’t have money saved up in an emergency fund. In fact, only 44% of people have at least three months’ worth of expenses saved, according to Bankrate’s Emergency Savings Report.
Can lead to debt addiction
Getting a personal loan is easy and fast, so it’s tempting to take out a loan whenever you’re short on cash. Debt should always be a last resort, not a first resort in an emergency.
Should I get an emergency loan?
Taking out a personal loan in an emergency can be beneficial, but it’s not for everyone. Depending on your financial situation and the purpose of the loan, taking out a personal loan may or may not make sense.
If you need an emergency loan
There are times when taking out an emergency loan makes sense, especially if paying cash for an emergency would deplete your savings and leave you unable to pay for basics like rent, groceries, or utilities.
- Unforeseen home repairs: Whether it’s a leaky roof during the rainy season, a broken air conditioner in the summer, or a broken heater in the winter, repair bills can quickly add up to thousands of dollars. With an emergency personal loan, you can cover some or all of the costs.
- Car repair: If you live in an area with poor public transportation, having a working car is a must. Major car repairs can quickly become expensive, as can temporary transportation options like Uber. Getting an emergency loan could get you back on the road sooner.
- Dental treatment: Unfortunately, even the best dental health insurance doesn’t fully cover all kinds of dental treatments. An emergency crown or repairing a chipped tooth can cost thousands of dollars, and you may need an emergency loan.
- Personal tragedy: While some airlines offer condolence fares, flying family members across the country to attend a loved one’s funeral can be costly, and an emergency loan can give you more time to pay off the loan while you grieve.
When to avoid emergency loans
The last thing you want to do is borrow money at a double-digit average interest rate that you don’t actually need, and there are some situations where it just doesn’t make sense.
- It’s not a need, it’s a desire. You may feel stressed and need to leave town urgently to de-stress, but it’s not a necessity. Emergency loans should be set aside for expenses that prevent you from working, eating, staying healthy, and maintaining a safe home. Everything else is probably something you want.
- I am planning to change jobs: Personal loan approval is based on your current income. If you are planning to change jobs or change jobs, use a credit card instead of a personal loan. Minimum payment options on credit cards allow you to make lower payments while you are job hunting or waiting for your first paycheck.
- Have an emergency fund: The purpose of an emergency fund is to be used when an emergency occurs. It’s much cheaper than paying 24-84 months of interest on an emergency loan, so make sure you start saving and replenishing it as soon as possible.
Emergency Personal Loan Alternatives
Whether your application for an emergency personal loan has been rejected due to credit issues or you want to explore other options before applying, there are some alternatives to consider.
- Use your existing credit card: If you have available credit, your existing credit cards will be your greatest ally in an emergency. Try to pay them off as quickly as possible to avoid damaging your credit score.
- Check out these cash advance apps: If you qualify for a cash advance app, you can get up to $750 worth of cash from your next paycheck. Some of these apps are free or offer optional tips, but if you need funds quickly, you’ll have to pay a small fee or subscription to use the app.
- Borrowing from friends and relatives: Reach out to friends and family and ask them to borrow the cash you need; they may be happy to help. Only borrow an amount you can comfortably repay, and make sure the agreement is in writing to avoid any confusion.
- Contact your local charities and nonprofits: Call 211 to inquire about financial resources available in your area. Depending on where you live, you may be eligible for interest-free loans or grants.
- Request a payment plan: Contractors, clinics, and auto repair shops might offer installment plans to help you pay off big bills, and even if they don’t, it never hurts to ask if they can accept regular payments of the remaining balance instead.
- Apply for a 0 percent APR credit card: If you have good or excellent credit, you may be able to qualify for a 0 percent APR credit card. These cards don’t charge interest on purchases during an introductory period, usually between 12 and 20 months.
- Receive a salary advance: Check your employer’s policies to see if they have specific guidelines for receiving advances. This is a good option for emergencies, but like any pay advance app, you’ll end up with insufficient funds come your next payday.
Conclusion
Emergency loans are easy to apply for, flexible and fast, but they also come with drawbacks, such as higher costs, that you should consider when deciding whether they’re right for you.
Be sure to shop around for multiple lenders and get pre-qualified. Compare loan amounts, interest rates, and terms to make an informed decision and choose the right lender.
Most importantly, do the math to determine if an emergency loan is right for your finances, or if alternatives like a salary advance, payment plans, or a loan from a friend or relative would be a better choice.
