6 types of emergency loans and their uses

There are a variety of emergency loans to choose from, depending on the type of emergency you need to fund. Most types of emergency loans can provide you with quick access to cash, and some have long repayment terms to keep your payments low.

If you haven’t built up an emergency savings account or don’t want to use the funds in it, an emergency loan may be a good alternative. However, with some bad credit emergency loan rates as high as 400 percent, learning about the options ahead of time may help you avoid taking out an unaffordable loan in the midst of a crisis.

1. Personal loans

Personal loans give you all your cash at once with terms that are repaid in fixed monthly installments typically ranging between one and seven years. A key benefit of a personal loan is it can be funded as soon as one day after you apply, which comes in handy in an emergency.

They’re offered by banks, credit unions and online lenders. Excellent credit personal loan APRs may be in the 6 percent range, making them a cheaper alternative than credit cards. However, bad credit loan APRs may be over 30 percent, making them an expensive emergency financing option.

Pros

• Quick access to cash.
• Typically doesn’t require collateral.
• Lower interest rates than other forms of financing.

Cons

• Steep interest rates on loans for poor credit borrowers.
• Loan origination fees and other fees depending on the lender.
• Repayment options are shorter than home equity lending options.

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 may allow you to access cash quickly from an ATM or bank branch in an emergency. Since the cash advance is tied to your existing card’s credit limit, it doesn’t require an additional credit check. While credit card cash advances may be a quick and easy funding choice, they typically have higher interest rates than your card’s standard variable APR.

There are also some serious drawbacks to consider. For one, your cash advance amount is limited by a percentage of your card’s limit, a set maximum amount or both. Interest will also start to accrue right away on a credit advance, as there often isn’t a grace period. And you’ll likely have to pay a transaction fee between 3 and 5 percent of the purchase amount. These fees can quickly add up, especially if you can’t quickly pay back the advance.

Pros

• Funds are accessible from any ATM.
• Cash advance option may already be set up on an existing credit card.
• No additional credit check required for most advances.

Cons

• High rates and fees.
• Borrowing amount is limited.
• Interest begins accruing immediately.

3. Payday loans

A payday loan is a type of instant loan that lets you borrow $500 or less, usually without a credit check. Payday loans typically have to be repaid within two weeks or by your next pay period.

This kind of emergency loan is generally considered extremely risky because payday lenders can charge interest rates as high as 400 percent, according to the Consumer Financial Protection Bureau.

The exorbitant interest charges often make it hard for people to repay what’s owed by the due date. This can then lead to excessive lender fees, multiple overdraft charges and a cycle of debt that is difficult to get out of.

Pros

• Easy to qualify for, often without a credit check.
• Fast funding.

Cons

• Extremely high interest rates and fees.
• Short repayment period.

4. Title loans

A title loan is another type of emergency loan that gets you fast access to cash secured by equity in your car. Also called a “pink slip loan,” this option allows you to borrow against 25 to 50 percent of the current market value of your vehicle.

These loans are short-term options that have repayment periods of 15 to 30 days. Most are single-payment loans, but some lenders may offer installment plans. You may also qualify for a title loan without undergoing a hard credit check.

Unlike some other emergency loan options, title loans are secured and require you to use your car for collateral. If you can’t repay the balance by the end of your loan term, the lender can seize your vehicle as repayment.

Pros

• Quick access to cash.
• Easy to qualify for.

Cons

• A lender can repossess your vehicle if you default on the loan.
• Must own and have equity in a vehicle.

5. Home equity loan or HELOC

If you’ve racked up some expenses from a medical or home repair emergency and have enough equity in your home, you might be eligible for a home equity loan or home equity line of credit (HELOC). You may be able to borrow thousands depending on your home’s appraised value and how much you have left on your first mortgage, but it may take up to six weeks to get your funds.

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.

While the lengthy repayment terms may be beneficial when paying off larger balances, home equity products are secured and use your home as collateral. If you fail to repay your balance, your home could be foreclosed on to pay the delinquent balance.

Pros

• Lower rates on average compared to other options.
• Longer repayment terms than other emergency loan types.
• Interest may be tax deductible if used entirely for home repair emergencies.

Cons

• Often a slower process than other options.
• Lenders can foreclose on your home if you default on the loan.
• May need to pay closing costs.

6. Paycheck advances

Some employers offer paycheck advances, which allow you to receive upfront funds from your future earnings. Employers that offer this benefit, may set limitations on advance amounts and how often you can access them.

There are also third-party apps like Dave and Earnin that offer cash advances that you repay with your next paycheck. There is usually a fee for each advance and you may be charged a monthly subscription or maintenance fee to use the services.

Pros

• Employee paycheck advances may be interest free.
• Third-party paycheck advance apps may be available.

Cons

• Advanced amount is subtracted from your next paycheck.
• Usually only for small amounts.

What can emergency loans be used for?

You can use an emergency loan for just about any unexpected expense you don’t have the cash to pay for. However, there are some urgent common scenarios that lead consumers to borrow money.

Car repairs

Significant repairs like an engine or bumper replacement can easily cost more than $1,000. Less than half of U.S. adults would have enough saved up to cover that cost, according to a 2023 Bankrate survey. An emergency loan might be the only path to getting your vehicle back on the road.

Medical expenses

Even with health insurance coverage, the average U.S. employee paid $1,735 out of pocket in 2023 before hitting their deductible, according to recent data. If the provider won’t offer any payment plans and demands immediate repayment, an emergency loan can help you avoid collection actions.

Home repairs

You could face a bill ranging between $350 to nearly $5,000 for the most common emergency home repairs, based on HomeAdvisor’s most recent data. The good news is the average U.S. mortgage-holding homeowner has $300,000 worth of equity, which can be converted to cash to cover repair costs by taking out a home equity loan or a HELOC. Just remember: You’ll have to pay the balance off when you sell the home, which could cut into your resale profit.

Natural disaster

You might not think it could happen to you, but a Bankrate survey found more than half of Americans (57 percent) were financially affected by extreme weather events ranging from tornadoes to heavy snow and flooding. Although your insurance may cover the costs, an emergency loan may bridge the gap until your insurance settlement funds arrive.

Funeral costs

The sudden loss of a loved one may result in unexpected funeral costs. Even if they’re covered by life insurance, the claim may take time to process, which could leave family members or a grieving spouse searching for a way to pay the $6,971 to $7,848 cost of an average funeral in the U.S.

What are alternatives to emergency loans?

Payment plans

According to the Consumer Financial Protection Bureau, some of the most common financial emergencies result from unexpectedly large bills for car repairs, home repairs and medical bills. If your urgent need for a loan results from one of these types of expenses, you might be able to negotiate a payment plan with your provider’s billing department.

A payment plan may allow you to pay off the bill without interest charges, depending on who you’re negotiating with. This could save you several hundreds or even thousands of dollars that you’ll pay if you finance the bill with an emergency loan. You may also be able to avoid excessive fees and penalties by being proactive and working out a payment arrangement sooner than later.

Pros

• Some payment plans come with interest-free periods.
• May be able to negotiate smaller monthly payments.
• Multiple repayment options may be available.

Cons

• You may be charged interest or a fee.
• Not every provider or company offers a repayment plan.
• The repayment terms may not be affordable.

Friends or family members

A family member or friend may be willing to lend you money in an emergency, but it’s important to set expectations for repayment as soon as possible. Be realistic about how quickly you can pay the money back, and ask them if they want it all back at once or would be willing to accept monthly installments over a set period of time.

It’s also wise to ask if they expect interest on top of the principal amount. One caveat: The person lending you funds may end up with a tax bill if they don’t charge interest — the IRS may look at the uncharged interest as a gift.

Pros

• A family member may charge you little to no interest.
• Don’t have to qualify for the loan or provide paperwork.

Cons

• Can cause strife between friends and family.
• May be tax implications for the person lending the money if they don’t charge you interest.

Which emergency loan should you get?

The right emergency loan for you depends on a number of factors, including how quickly you need the money and how much you need to borrow.

• Best emergency loans for fast funding. Personal loans, credit card cash advances, payday loans and title loans will put money in your pocket the fastest. You’ll get the best personal loan rates or credit card advances if you have good credit. If your credit is poor, consider a payday loan or payday advance, but make sure you clearly understand the risks first. If you need a title loan, make sure you can pay it back to avoid losing your car.
• Best emergency loans for long terms. Personal loans, home equity loans and HELOCs give you the longest payoff terms, which will help keep your payment as low as possible. However, you’ll end up paying hefty interest charges if you can’t pay the balance off early.
• Best emergency loan for large loan amounts. A personal loan is usually best if you need up to $50,000, while a home equity loan or HELOC may allow you to borrow over $100,000, depending on how much equity you have.
• Best alternatives to emergency loans. Payment plans and borrowing from relatives can help you avoid interest charges and qualifying headaches. However, make sure you budget for your reduced earnings with a payday advance or have a good relationship with a friend or family member you borrow from.

Bottom line

Most experts recommend saving three to six months of expenses to avoid needing to finance an emergency. To avoid paying extra interest on emergency costs, do your best to stash extra cash to build up your savings. Keeping your credit in tip-top shape can help you get the lowest rates at the best terms if you end up needing a loan in an urgent situation.