Having a financial safety net can help you get through difficult times. Experts generally suggest having between three and six months’ worth of expenses saved for an emergency fund. But unexpected situations can come up, sometimes before you’ve built a rainy day fund.
If you’re facing a large unplanned expense, there are a few types of emergency loans that might help. Keep reading to learn about four kinds of emergency loans and who they’re best for, plus alternatives.
4 types of emergency loans
1. Personal loans
Personal loans are offered by lenders such as 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 that you borrowed, you pay interest and 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.
Who this is best for: Borrowers who are looking for lower interest rates than credit cards and high borrowing limits that don’t require collateral.
2. Credit card cash advances
Credit cards, when used responsibly, can be useful tools in the event of 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.
Credit card cash advances have higher interest rates than your card’s variable APR. Since the cash advance is tied to your existing card’s credit limit, it doesn’t require an additional credit check.
Who this is best for: Cardholders who already have active credit cards in good standing and need to borrow small amounts. It might also be an option for existing cardholders whose credit score might not qualify them for a new line of credit.
3. Payday loans
Payday loans are a type of instant loan that lets you borrow a small amount (usually a few hundred dollars). The repayment term for these types of emergency 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.
Who this is best for: Borrowers who need small amounts of money and can repay the loan in full within a short period. Whenever possible, payday loans should be avoided; instead, consider emergency loan alternatives. See below for more options.
4. Title loans
Another kind of emergency loan is a title loan. These are secured loans that use your vehicle title as collateral (hence the name). If you’re unable to repay the loan by the end of the loan term — typically 30 days — the lender can repossess your car to settle the outstanding debt.
In addition to using your car to secure the short-term loan, title loans have high interest rates similar to payday loan rates. According to the Federal Trade Commission, title loans charge rates as high as 300 percent.
Who this is best for: Consumers who want to borrow small amounts and can repay their loans within a month. A title loan might be an option for borrowers who can’t access other types of emergency loans, but it should be considered a last resort.
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.
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. Currently, personal loan rates start at around 5.99 percent APR for borrowers with strong credit.
If an unsecured personal loan isn’t a viable option, consider turning to emergency loan alternatives.
Alternatives to emergency loans
1. 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 that you can draw funds from 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.
Who this is best for: Homeowners who need large loans for necessary expenses such as home renovations or repairs or education costs.
2. Payment plans
If your urgent need for a loan is the result of an unexpected bill, a payment plan is an alternative to an emergency loan. For example, let’s say 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.
Who this is best for: 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.
3. Paycheck advance
Some employers offer paycheck advances, also called payroll advances, through the company’s human resources department. A paycheck advance provides you with up-front funds from your future earnings. Depending on your employer’s payroll advance agreement and your state laws, the loan might be automatically deducted from your paychecks in installments.
If your employer offers this benefit, it might have limitations with regard to amounts and how often paycheck advances are allowed.
Who this is best for: Individuals who need small, short-term loans and work for employers that offer this loan option.
4. Friend or family member
Borrowing money from a friend or family member can be a difficult decision. However, it’s an option that can be helpful to address unexpected bills. 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 if installment payments are OK. 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.
Who this is best for: Those with strong relationships with family members or trusted friends who are willing to help.
Taking on additional debt to pay for a sudden expense can be a tricky situation to navigate if you’re unable to repay the emergency loan. Before considering which kinds of 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 around to find an emergency loan with the lowest interest rate and borrow only what you need.