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If you’re like the more than half of Americans who can’t cover a surprise expense, using an emergency loan can be an option. Most types of emergency loans can provide you with quick access to cash when there isn’t enough in your rainy day fund. Plus, some have flexible repayment terms that allow you to make lower monthly payments.
However, not all emergency loans are created equal. For instance, while some come with lower interest rates for well-qualified applicants, others come with interest rates as high as 400 percent. Before you decide, learn how these four common emergency loans work and consider alternatives.
1. Personal loans
Personal loans are offered by banks, credit unions and online financial institutions. With a personal loan, you receive funds as a lump sum that you repay in monthly installments. In addition to repaying the principal amount you borrowed, you pay interest and sometimes fees.
One benefit of a personal loan is that it lets you repay a large sum over a longer period of time. Repayment terms vary by lender but can typically be as short as one year or as long as seven years for qualified borrowers.
Another key benefit is that you can receive quick funding — some lenders can issue your loan funds as soon as one business day.
However, a major downside is that if you have a less-than-stellar credit score, you may have to pay a high annual percentage rate (APR) — interest plus fees. Some lenders also have origination fees and maximum APRs greater than 30 percent.
Borrowers looking for lower interest rates than credit cards and high borrowing limits that don’t require collateral.
- Quick access to cash
- Typically doesn’t require collateral
- Some lenders have flexible repayment terms
- Steep interest rates on loans for subprime borrowers
- Loan origination fees and other fees depending on the lender
- Some lenders have flexible repayment terms
2. Credit card cash advances
Credit cards, when used responsibly, can be useful tools in an emergency. Many credit cards offer a cash advance feature that lets you access cash conveniently from an ATM or bank branch. How much cash you can borrow is limited by either a percentage of your card’s limit or a set maximum amount.
Since the cash advance is tied to your existing card’s credit limit, it doesn’t require an additional credit check. Still, credit card cash advances have higher interest rates than your card’s variable APR. There is also no grace period like you get with everyday purchases. So, interest will start to accrue on the funds right away. You’ll also likely have to pay a transaction fee between 3 and 5 percent of the purchase amount.
Cardholders with active credit cards in good standing need to borrow small amounts.
- Funds are easily accessible from any ATM
- High cost of borrowing
- Same-day funding
- No grace period
3. Payday loans
Payday loans are a type of instant loan that let you borrow a small amount — usually a few hundred dollars. The repayment term for these loans is extremely short, often within two weeks or by your next pay period.
This kind of emergency loan is generally considered predatory because it charges exorbitant interest rates. According to the Consumer Financial Protection Bureau, payday loans typically charge interest as high as 400 percent. Furthermore, borrowers often cannot repay what’s owed by the due date, leading to excessive lender fees, multiple overdraft charges on your bank account and an even deeper debt hole.
Payday loans should be avoided unless you can repay within a short period; instead, consider emergency loan alternatives.
- Easy to qualify for
- Sky-high interest rates and fees
- Fast funding
- Short repayment period
4. Title loans
A title loan is another type of emergency loan that gets you fast access to cash. You may also qualify for a title loan without undergoing a hard credit check.
It’s a secured loan that uses your vehicle title as collateral, hence the name. If you cannot repay the loan by the end of the loan term — typically 30 days — the lender can repossess your car to settle the outstanding debt.
Title loans should be a last resort, and should not be used unless there is no other alternative and the need is dire.
- Quick access to cash
- High interest rates
- Some lenders don’t require a credit check
- A lender can repossess your vehicle if you default on the loan
5. Home equity loan or home equity line of credit (HELOC)
If you’ve built up enough equity in your home, you might be eligible for a home equity loan or home equity line of credit (HELOC). Based on your home’s appraised value and how much you have left on your first mortgage, you may be able to borrow thousands of dollars.
A home equity loan is an installment loan that offers lump-sum funding, a fixed interest rate and repayment terms of up to 30 years. A HELOC is a revolving line of credit from which you can draw funds for a fixed time, such as 10 years, with a repayment period of up to 20 years afterward.
Both types of loans use your home as collateral, which puts it at risk of foreclosure if you can’t repay the loan.
Homeowners who need large loans for necessary expenses.
- Lower rates on average compared to personal loan and credit card rates
- Flexible repayment terms
- Requires a certain amount of equity in your home
- Lender can take your home if you default on the loan
6. Payment plans
If your urgent need for a loan results from an unexpected bill, a payment plan is an alternative to an emergency loan. A situation when this might be possible is if you have a large medical bill that you can’t pay outright. You might be able to negotiate a manageable payment plan with your provider’s billing or accounting department.
Individuals who can pay for large expenses with lower monthly payments over longer repayment terms. This alternative is ideal because it avoids putting you further into debt.
- Some payments plans come with interest-free periods
- You may be charged interest or a fee
7. Paycheck advances
Some employers offer paycheck advances, also called payroll advances. A paycheck advance provides you with up-front funds from your future earnings. Depending on your employer’s payroll advance agreement and state laws, the loan might be automatically deducted from your paychecks in installments.
If your employer offers this benefit, it might have limitations on amounts and how often paycheck advances are allowed.
Individuals who need small, short-term loans.
- Some employers offer interest-free paycheck advances
- Apps are available to make the process easier
- Cuts into your next paycheck
- Usually only for small amounts
8. Friends or family members
Borrowing money from a friend or family member can be a difficult decision. However, it’s an option that can be helpful when unexpected bills arise. If you have a willing family member or friend who agrees to give you an emergency loan, sit down with them to get on the same page about repayment expectations.
Discuss whether they want to be paid in a lump sum or in installments. If the latter, how long are they willing to give you to repay the entire loan, and how much do they expect for each installment? It’s also wise to ask if they expect interest on top of the principal amount.
Those with strong relationships with family members or trusted friends who are willing to help.
- A family member may charge you little to no interest
- Potential fast speed of funding
- Defaulting on the loan can ruin your relationship
- Can cause strife between friends and family
Which emergency loan should you get?
Among the four kinds of emergency loans discussed above, personal loans offer the lowest out-of-pocket cost to borrow without the potential social implications of borrowing from family or friends.
Although the interest rate you’re approved for depends on your credit history, personal loan interest rates are still incredibly lower than payday or title loans. Personal loan rates currently range from about 6 percent to 36 percent; the average rate is 10.56 percent as of Jan. 18, 2023.
Choosing the right emergency loan solution for you, however, depends on a few factors.
- Collateral. Emergency loans can be secured or unsecured, depending on the lender’s offerings and your qualifications.
- Discounts. Don’t forget to factor in any discounts you might be eligible for when choosing which personal loan you should get. One example is an interest rate discount. Some lenders reduce your interest rate by a small percentage as an incentive to enroll in automatic loan payments.
- Eligibility. To determine if you qualify for an emergency loan, lenders evaluate multiple factors, like your credit score, income and debt-to-income ratio. Some lenders are flexible with certain factors so pay attention to these details.
- Fees. Fees add up, and not all lenders charge the same fees or fee amounts. Ask about application fees, origination fees, late fees and any other fees that might apply to you.
- Funding timeline. Find a lender that offers speedy funding if you need the loan funds ASAP. For example, some lenders can fund within the same day of approval.
- Interest rates. The higher your credit score, the better interest rate you might qualify for. A low-rate loan reduces your total out-of-pocket borrowing costs.
- Repayment term. Like other loan details, lenders offer varying repayment terms. Some loans are as short as two years, while others are as long as seven years.
Before moving forward with an emergency loan, use a personal loan calculator to see how much your monthly payment might be and how much you’ll pay in interest and fees overall. If an unsecured personal loan or other loan option described above isn’t viable, consider turning to emergency loan alternatives, such as negotiating a payment plan with your creditor.
The bottom line
Taking on additional debt to pay for a sudden expense can be tricky if you cannot repay the emergency loan. Before considering which emergency loans make sense for you, consider if there’s a way to save for the expense as a first option.
If saving up isn’t possible, shop for an emergency loan with the lowest interest rate and borrow only what you need.