A recent Bankrate survey revealed that most Americans (58 percent) are uncomfortable with the amount of emergency savings they have. That same survey also found that 34 percent of Americans have less saved today than a year ago, while close to a quarter say they have no savings.

One option for those with insufficient rainy-day savings is an emergency loan. This funding alternative covers your expenses in case of a large, unforeseen expense — even if you have less-than-stellar credit. There are a few types of emergency loans, but they almost always come with very short terms (usually weeks or months) and high interest rates and fees.

While you should try to plan your finances to have an emergency fund for unexpected costs, that’s often easier said than done. Sometimes emergencies come up when you least expect them, and an emergency loan might be the only viable option to fend off an even bigger problem.

Bankrate insight

Emergency loans are a type of unsecured installment debt. They can be a lifesaver but can carry higher interest rates and have shorter repayment terms than other credit products.

What is an emergency loan?

An emergency loan is a debt product used to cover the cost of unexpected expenses if you’re running low on cash. They’re accessible rather quickly – as soon as one business day or the same business day – and are often without the stringent lending guidelines you’ll find with some loans from traditional banks.

How do emergency loans work?

It depends on the type of emergency loan you choose. However, most are dispersed in a lump sum and payable in monthly installments over a set period. The loan term varies by loan product, and interest rates can be fixed or variable. If it’s the latter, your loan payments will likely fluctuate over time.

There are also unsecured and secured emergency loans. The latter requires collateral – like a vehicle title – to get approved. It’s also riskier since defaulting on the loan agreement means you could lose your asset.

Emergency loan statistics

  • Over one-third of Americans have less savings in 2022 than they did the year before, while almost a quarter have more saved.
  • Twenty-three percent of Americans have no savings at all — down from 25 percent in 2021.
  • Millennials have less saved than other generations. Only 40 percent of millennials have at least three months worth of expenses saved, compared to 47 percent of Gen Xers and 62 percent of baby boomers.
  • Personal loans — a type of emergency loan — have an average interest rate of 11.08 percent.
  • The average approved personal loan applicant has a credit score of 741.
  • Borrowers with credit scores between 720 and 850 secure the best interest rates for personal loans, ranging between 10.73 and 12.50 percent.
  • Those with credit scores between 300 and 629 typically have the highest rates, ranging from 28.50 to 32 percent for a personal loan.
  • The average amount borrowed for new unsecured personal loans is $7,925 — an 11 percent increase from 2021.
  • Other types of emergency loans, like payday loans and car title loans, carry average APRs of close to 400 and 300 percent, respectively.
  • Credit card cash advances, which are another type of emergency loan, have an average APR of 24.80 percent and any amount borrowed starts accruing interest immediately.

Emergency loans and layoffs

  • Although jobs in health care, manufacturing, professional and technical services have been increasing in the U.S., so has the overall unemployment rate to 3.7 percent.
  • As of October 2022, the number of unemployed persons in the U.S. is 6.1 million.
  • Layoffs in the technology sector have increased close to 85 percent from last year, accounting for roughly 9 percent of all total layoffs in 2022.
  • Meta, Twitter, Lyft, Salesforce, Microsoft and Stripe are amongst the tech giants who have reduced their workforce by thousands in 2022.
  • Economists predict that the job market will get even tougher in 2023, as many expect the country to enter a recession due to high inflation and rising interest rates.
  • The typical severance package in the U.S. is one or two weeks of paid salary per each year the employee spent in the company.
  • The average unemployment insurance benefit isn’t enough to get by. For example, the average weekly payout in Louisiana is $180.67, but individuals actually need $712.73 a week to cover basic needs.
  • Forty percent of Americans who earn between $20,001 and $50,000 don’t have an emergency fund.
  • Roughly one-third of Americans say they would have to borrow money or sell something to be able to cover an unexpected $400 expense.

Types of emergency loans

An emergency loan does not have a strict definition; it’s a catchall for short-term loans that are meant to be used only in emergencies. Here are a few types of loans that could be considered emergency loans.

Personal loans

A personal loan is an unsecured loan that allows you access to a fixed amount of cash without any collateral. You then pay it back in fixed monthly installments over the course of the loan term.
When borrowing money for an emergency, personal loans should be one of your first options. For one, they can be used to pay for almost anything, making them ideal for any type of situation.
Personal loans also carry much lower interest rates than other types of emergency loans. According to a Bankrate study, they have an average interest rate of 11.08 percent, but depending on your credit score, you could secure rates as low as 5.60 percent.

Personal loans also feature a variety of repayment terms. They can be paid off in as little as 24 months or as long as 10 years, depending on the lender.

Credit card cash advances

In most cases, you use a credit card to make payments directly to a merchant. While that is useful for making purchases at places that accept credit cards, it doesn’t help you if you need actual cash. In that case, you can get a cash advance from your credit card.

Be aware, though, that many credit cards charge fees for cash advances. These fees are typically 5 percent of the borrowed amount or $10 — whichever is higher. Interest starts accumulating as soon as you get your cash, even before your next statement. Cash advances also carry an independent APR from your regular credit card purchases. These APRs are typically on the higher side, with the average APR for a credit card cash advance being 24.80 percent.

On the bright side, payoff times are flexible so you don’t have to pay it off immediately. However, the longer you take to pay it off, the more money you’ll pay on interest.

Payday loans

A payday loan is an emergency loan with a very short term, usually only a week or two. Payday lenders typically market their loans as available even if you have bad credit. Payday lenders will give you money now with the promise that you will repay them with your next paycheck. These loans typically come with outrageous interest rates.

According to the Consumer Financial Protection Bureau (CFPB), payday loan fees range from $10 to $30 for every $100 borrowed. That means that the typical two-week payday loan can have an APR close to 400 percent. That’s why these types of loans should be avoided at all costs.

Car title loan

A car title loan is similar to a payday loan, but instead of being unsecured, it is secured by the title to your car or another vehicle. Using your vehicle as collateral can help reduce the fees and interest you pay since the loan is secured.

Bottom line

Some emergency loans are healthier for your finances than others. Even when you need money quickly, take a little bit of time to look at your options so you can get the funds you need without hurting your financial health in the long run.