We all know that old cliche: life comes at you fast. It sure is true. Life is full of unexpected twists and turns, and even the most prepared of us can be caught off guard. Unfortunately, many of life’s surprises can be quite expensive, like an unexpected home repair, legal expense, or car trouble. When you simply don’t have enough in the bank account to pay for the unexpected, what is there to do?
For some, the answer to this dilemma is an emergency loan. Read on to learn all about emergency loans, the different types of emergency loans available, and to help decide if an emergency loan is right for you. Or, use the links below to jump ahead to a section of your choosing.
- What is an emergency loan?
- Can I get an emergency loan with bad credit?
- Different types of emergency loans
- How to choose an emergency loan
- Emergency loan alternatives
- Prevent future emergencies by building an emergency fund
What is an emergency loan?
An emergency loan is a type of loan that can be taken out on extremely short notice. Aptly named, an emergency loan is typically taken out in the event of an unexpected and pressing expense, such as a hospital bill from a sudden illness, auto repairs from a car accident, or to cover funeral expenses for an unexpected passing.
Can I get an emergency loan with bad credit?
The short answer is yes—most people with poor credit can qualify for an emergency loan. However, getting an emergency loan with poor credit can come at a cost. Some types of lenders raise interest rates significantly when lending to those with bad credit.
Different types of emergency loans
There are various types of emergency loans available, the most common of which are personal loans, credit card cash advances, or payday loans. Let’s review the pros and cons of these common emergency loans.
A personal loan is a flexible loan from which the fund can be used for a variety of different purposes, including to pay for an emergency cost. When you take out a personal loan, you’ll agree to a set loan amount, which you’ll receive upfront. You’ll also agree upon an interest rate and repayment terms. Your repayment will take place in fixed-amount installments over the course of a predetermined period of time, typically up to 7 years, until the loan amount plus interest are repaid.
There are a number of upsides to personal loans. First, a personal loan can give you the opportunity to get the most cash of all emergency loans. Next, a personal loan is what’s known as an unsecured loan. This means that you don’t need to give any collateral in exchange for the loan, such as home equity or a savings account. Additionally, while personal loans can come with a range of interest rates, these tend to be lower than credit card interest rates. Average APRs for borrowers with strong credit can be as low as 4%. A personal loan that is paid on time over the course of the loan terms can result in positive credit, improving your overall credit score.
On the downside, because a personal loan must go through an approval process, it can sometimes take a few days for the cash from a personal loan to become available. Additionally, the terms of a personal loan can be very dependent upon your existing credit, sometimes making it a poor choice for those with poor credit. APRs can reach up to 36% for borrowers with bad credit.
Credit card cash advances
Did you know that you may be able to use your credit card to unlock cash? Just like with a debit card, you can get cash from an ATM or the bank using your credit card. This is what’s known as a credit card cash advance.
Cash advances are the simplest type of emergency loan. There’s nothing more required of you than entering your card and pressing a few buttons. You can get access to cash immediately, and use the cash however you please. The limits on how much cash you can get depends on the specifics of your credit card, so you’ll need to contact your credit card company to find out. Typically, however, you can expect it to be less than your credit limit. Additionally, a credit card cash advance has no requirements in terms of payback. You can pay the money back at the speed of your choosing.
The downside of credit card cash advances are the terms. The APR (annual percentage rate) of a credit card cash advance is typically many times higher than standard credit card interests. This means that you may be paying up to 21% of the borrowed amount over the course of a year. Most credit companies will also charge you a percentage of the borrowed amount when you receive the cash as an upfront fee. Just like a credit card, a credit card cash advance has a direct impact on your credit score, so be sure you’re keeping track.
You’ve probably heard of payday loans via commercials on the radio or television. These are typically small loans, averaging around $350, with extremely short terms, like 2 weeks or less. They present themselves as an advance on your upcoming paycheck, effectively making your paycheck available before the end of the pay period. Payday loans are available online, but they also may be available at your local grocery store.
The most significant upside of a payday loan is that pretty much anyone can qualify for one. They’re also extremely simple. The money will be either given or mailed to you, or deposited into your bank account. The payback terms are most often a lump sum via check, online portal, or direct debit by the agreed upon date. Payday loan terms are also set in stone, meaning that poor credit will not land you with worse terms. In fact, many payday lenders forgo a credit check altogether.
The simplicity of the payday loan, however, comes at an exorbitant cost. A payday loan can be one of the most costly loans on the market, with an average APR of 400%. If you cannot make good on a payday loan in its extremely rapid turnaround period, you can quickly get into hot water. Unfortunately, most payday borrowers can’t. 8 in 10 payday borrowers cannot repay their loan in the agreed upon time period and re-borrow or roll their loans into the next period, and 2 in 10 default altogether.
How to choose an emergency loan
Finding the emergency loan that’s right for you depends on your specific situation. Consider what the priority is when it comes to your loan. Do you need money today? Looking for a loan with the shortest turnaround time may be the best option. Do you need a longer term loan or flexible due date? Are you looking for a loan with the lowest interest rates possible? These types of questions can guide your choosing.
Emergency loan alternatives
Emergency loans certainly do come at a cost. For that reason, it’s best to explore all other options before resorting to an emergency loan. Let’s review a few other ways to come into money quickly.
- Borrow funds from friends or family
- Request a paycheck advance from your employer
- Research local charities, nonprofits, and organizations in your area, to see if there is a fund available to you
- Visit usa.gov to determine whether government assistance is available to you
- If you have strong credit, see if a 0% APR credit card is available to you, and use the 0% APR period to cover expenses at no interest
- If you are a homeowner, take out a home equity loan, a secured loan that offers equity in your home as collateral
- In the event of a medical emergency, explore your options for medical bill repayment with your medical provider
- In the event of student loan hardship, explore your options for lower monthly payments or an income-driven repayment plan from your student loan lender
Prevent future emergencies by building an emergency fund
We know that not every expense can be premeditated. That’s why your best defense against emergencies is an emergency fund. Ideally, your emergency budget should have a minimum of three months worth of living expenses, but any emergency fund is better than none. If you’re looking to start budgeting for an emergency fund, Mint can help. Contact us today to learn how to save for an emergency fund.