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Life happens, and sometimes those unexpected expenses can drain your savings. But what if you’re low on cash and don’t have much saved?
An emergency loan can be a great option if you don’t have the cash to cover those costs you weren’t prepared for. But before you apply, you’ll want to understand how they work, get prequalified and compare your options to determine if a loan is worthwhile. Here’s what you need to know.
What is an emergency loan?
An emergency loan is an unsecured, small-dollar loan you can take out on short notice to cover a sudden expense like a car repair or medical bill. There are various types of emergency loans, including, credit card cash advances and payday loans.
What can you use an emergency loan for?
Emergency loans are meant for small, urgent expenses. Because they are typically personal loans, there are very few restrictions on how they can be spent — although it varies by lender. In general, you can use an emergency loan to cover things like car repairs, unexpected bills, medical care and other short-term costs.
Like other personal loans, emergency loans cannot be used for anything illegal. Lenders also block you from using it for tuition expenses, though you may be able to purchase textbooks or other school-related items with one.
Since emergency loans are not large — most will be under $1,000 — you won’t be able to fund anything expensive like a car purchase. But aside from a few restrictions that your lender will set, you should be able to use an emergency loan to cover a wide variety of costs.
Types of emergency loans
There are several types of emergency loans to choose from, including:
Emergency loans that fall into this category are accessible through banks, credit unions and online lenders. They’re generally unsecured and offer quick access to cash. However, you can expect steep interest rates if you have a lower credit score.
Credit card cash advances
You can pull cash from your credit card at a nearby ATM, up to the allowable cash advance amount, if your credit card offers this feature. It’s a quick and convenient way to get the cash you need, but there are a few major downsides. The funds you draw will typically be subject to a higher APR, and some credit card issuers charge a transaction fee of up to 5 percent for cash advances. Plus, there’s no grace period on the funds you advance, so you’ll start accruing interest on the cash advance amount right away.
These loan products cater to credit-challenged customers who need fast cash and can’t get approved elsewhere. You can get approved and funded on the same day, and the loan is usually due by your next payday (or within two weeks). The downside is interest rates on payday loans are some of the highest you’ll find on emergency loans. And you won’t get very long to repay what you borrow, possibly leading to excessive fees from both your financial institution and your lender if an electronic payment for the amount due is initiated from your bank and the funds are not available.
Car title loans
Title loans are another expensive form of lending that should only be used as a last resort when you’re in a financial bind. They’re secured and require you to hand over your vehicle’s title to the lender to get approved. Consumers who’ve paid their vehicles off often turn to car title loans to find relief since many lenders don’t require credit checks. However, you should exhaust all other options first since they come with short repayment periods – up to 30 days – and your car could be repossessed if you’re unable to pay the loan off in time.
6 factors to consider before applying for an emergency loan
Not all emergency loans are created equal, so it’s a good idea to do your research and compare all the options at your disposal.
1. Credit score
Most lenders will look at your credit score before they decide whether to approve you for an emergency loan. The higher your credit score is, the easier it will be for you to get an emergency loan and secure the interest rate and terms you want. Some lenders are open to borrowers with fair and poor credit, so don’t worry if your credit score isn’t in the best shape.
2. Repayment time
Repayment time is the amount of time you have to repay an emergency loan. It can range from a few months to several years. While a longer repayment time means lower monthly payments, it also means you’ll pay more interest in the long run. To reduce the cost of the loan, opt for a shorter repayment time. Just make sure you can comfortably afford the monthly payments.
3. Interest rate
Since the interest rate will determine the overall cost of your loan, it’s important to lock in the lowest rate you qualify for. If you don’t have the best credit, you may have to settle for a higher interest rate than you’d like. The good news is that you can improve your credit score by making your payments on time, which could open the doors to better rates in the future.
Analyze your spending plan to determine if you can afford the monthly loan payments. If this figure is too high, you can opt for a longer payment term and pay more in interest. Or you can reassess your needs and apply for a smaller loan amount with a monthly payment that won’t stretch your budget too thin.
5. Funding time
Once you get approved for an emergency loan, you’ll likely want the funds as soon as possible. Online lenders tend to pay out quickly, often the same day you apply, within 24 hours or a few days. However, traditional lenders such as banks and credit unions may take longer to approve your loan and distribute the funds.
6. Loan features
Other loan features include discounts for enrolling in automatic payments or free monthly credit score statements. Other features that may benefit you and lower the overall cost of your loan include no late fees and no prepayment penalties for paying your loan off early. Also, if you’d like to build or improve your credit, opt for a loan that will be reported to the major credit bureaus.
How do I apply for an emergency loan?
To apply for an emergency loan, follow these steps:
- Compare emergency loans: Check out the interest rates, repayment time, funding time, features and credit score requirements for several emergency loans. This way, you can choose the best option for your needs.
- Read customer reviews: Read customer reviews and check lenders’ ratings with the Better Business Bureau. Make sure the one you choose is a reputable lender with a positive track record.
- Get prequalified: Most lenders will allow you to prequalify within minutes. By prequalifying, you can avoid a hard credit pull on a loan application where your chances of approval are low or interest rates are too high. This is important because a hard credit pull can temporarily lower your credit score.
- Fill out the application: If possible, fill out an online application; they usually come with fast approval decisions. You’ll need to provide basic information about yourself and details about your income and employment. The lender may also require you to share documents like a government-issued ID and paystubs.
- Wait for a decision and funding: Depending on the emergency loan and lender you chose, you shouldn’t have to wait long for an approval decision and funding. While most lenders will distribute your money via direct deposit, some will do so through a check or prepaid card.
Alternatives for emergency loans
An emergency loan can be a good option if you have an emergency expense. It’s a type of financing that you should only use every once in a while.
If you can’t get approved for an emergency loan, consider these alternatives:
- Paycheck advances: Ask your employer for an advance on your next paycheck. If they approve, you’ll avoid having to take out an emergency loan and repay interest on the amount you borrow.
- Payment plans: Reach out to your creditors, lenders and service providers and let them know you’re experiencing financial hardship. They may be willing to work out a payment arrangement with you by splitting up the amount owed into small chunks or changing the due dates.
- Grants and interest-free loans: Call 211 to learn more about free assistance that may be available through charities and nonprofits in your local area.
- Loans from friends and relatives: This option lets you steer clear of a formal application process or credit checks by lenders. Plus, you may be able to avoid paying interest on the loan.
Ultimately, you shouldn’t rely on an emergency loan or another funding source to cover everyday expenses regularly. If you often struggle to pay for your rent or mortgage, utilities and groceries, you may have an income or budgeting issue that you need to address.
An emergency loan can help you get over an unexpected financial bump if you’re low on cash. Many lenders feature flexible eligibility criteria and extended payment periods, if needed, to give you ample time to get your finances back on track.
However, you could find that it may not be the best option for your financial situation. And in some instances, an alternative, like a paycheck advance from your employer, loan from a friend or relative or financial assistance through a grant program in your local area, could be a more viable solution.