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Emergency loans are a type of personal loan for people who find themselves in an unexpected situation and need cash fast. In general, they provide a lump sum of cash, and then borrowers pay off the loan at a fixed interest rate for a specific term.
Banks, credit unions, and online lenders may offer emergency loans. Eligibility and the cost to you will depend on creditworthiness. Typically, emergency loans have a lower maximum loan amount than some other types of lending products.
Learn more about how emergency loans work, how to qualify, and the pros and cons of using this type of loan.
Key Takeaways
- Emergency loans are meant to provide quick financial assistance to help you cover unexpected costs.
- Eligibility for emergency loans typically depends on factors like credit score and income.
- There are various types of emergency loans, each with its own set of features, advantages, and disadvantages.
- While emergency loans offer immediate relief, they have high interest rates and potential risks.
How an Emergency Loan Works
When deciding if an emergency loan is best for you, start by checking your credit score. You can then search for lenders and try pre-qualifying with one or two lenders to see if you’d meet their basic requirements for approval and get a sense of the interest rate you would receive. From there, you could use a personal loan calculator to see what your monthly and overall borrowing costs would be for different term lengths.
To get an emergency loan, the process is similar to other types of loans. First, you must complete an application, sharing your personal contact information, providing documentation about your income, and stating how much you are hoping to borrow. The lender will review your application and may ask for permission to review your credit.
Once a decision is made, you may be approved, denied, or receive an alternative offer. If approved, you’ll have time to review the loan agreement to decide if you accept. If so, you’ll sign the loan agreement, and funds will be deposited into your bank account of choice. Timing will depend on the lender; some even fund loans on the day of approval.
Types of Emergency Loans
The most common type of emergency loans are personal loans. They allow you to borrow a lump sum of money and pay it back with fixed payments for a specific term. In addition, there are a few different ways to borrow money for an unexpected situation.
- Payday loans: If you just need a small amount of cash, a payday loan gives you an advance on your paycheck. The downside is that these short-term loans have a high fee, but you won’t have to repay them over a long period of time like other loans since they are typically due within a short timeframe.
- Title loans: Another short-term loan option, a title loan is a secured loan that uses a car title as collateral. This could be an accessible emergency loan for people with bad credit, but these loans have very high APRs.
- Credit card cash advances: Most credit cards allow you to borrow cash from your line of credit, but you'll typically pay a higher cash advance APR and have no grace period. There is also an upfront fee added, typically around 3% to 5% of the amount borrowed.
Where to Get an Emergency Loan
If you need fast cash, you can get an emergency loan from several types of financial institutions. If you’re going the personal loan route, these are the three main types of lenders.
- Banks: Banks offer personal loans, and many offer fast funding, which can help in an emergency situation. Interest rates and fees vary, as do lending requirements, though bigger banks tend to have stricter qualifications.
- Credit unions: As member-owned institutions, credit unions sometimes have more flexibility to offer competitive interest rates for personal loans, including emergency loans. You’ll have to be a member to apply.
- Online lender: Online loan companies typically offer the fastest funding options as applications are completed online and processed quickly.
Warning
It’s important to research potential lenders—especially online ones that you may not be as familiar with—to make sure you’re not dealing with a predatory lender. Check the Better Business Bureau, read reviews, and look at consumer complaints.
Eligibility and Requirements
Most lenders that offer emergency loans will have similar eligibility criteria and documentation requirements. Here are some of the key factors lenders will consider.
- Identification: Expect to upload or share a copy of a photo ID such as your driver's license, passport, or other state identification. You’ll also need something to show as proof of address, such as a utility bill in your name.
- Age and citizenship: To get an emergency loan, or most any loan, you need to be at least 18 years of age. Some lenders might only work with U.S. citizens, though some might have options for non-citizens.
- Minimum credit score: Each lender sets its own credit score requirements, some more stringent than others. In general, if you have a credit score in the good to excellent range (670+), you should have no trouble being approved by most lenders. Those with lower scores may still get approved but might pay higher interest rates.
- Income: Lenders want to know about your ability to repay the loan, so you’ll need to show proof of income. You may have to submit documents like pay stubs, bank statements, or tax returns.
- Debt-to-income (DTI) ratio: In addition to what you earn, lenders also want to understand what your other obligations are so they can determine your DTI, or how much of your income is needed to cover your bills.
- Reason for the loan: Emergency loans are flexible and can be used for almost any reason, but there are usually a few exclusions such as college tuition, business expenses, gambling, illegal activity, or a home deposit.
Pros & Cons of Emergency Loans
Pros
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Fast access to funds
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Many options
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Easy to apply
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Flexibility in how to use the funds
Cons
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Paying interest
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Some loans have fees
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Another monthly bill obligation
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Low maximum loan amount
Pros Explained
- Fast access to funds: Emergency loans can provide money quickly to help you cover unexpected expenses. Other sources of funding, such as home equity loans, can take several weeks to process.
- Many options: You’ll find several types of emergency loans from various lenders. Each will have different interest rates, terms, and fees. Compare different loans to see which fits your needs.
- Easy to apply: The application process for an emergency loan is fairly straightforward. You’ll need to provide information required by the lender, which usually includes your personal information.
- Flexibility in how to use the funds: You can use the funds from an emergency loan to pay for nearly any expense, such as paying for a medical bill or car repair.
Cons Explained
- Paying interest: Emergency loans generally have a high interest rate, so they can be expensive, especially if you don’t pay them off quickly.
- Some loans have fees: Many lenders charge fees like a loan origination fee or a late fee if you miss payments. Read the loan terms carefully and fully understand the fees before signing a loan.
- Another monthly bill obligation: An emergency loan will add to your total debt, which can lower your credit score and increase your monthly payment obligations.
- Low maximum loan amount: Typically, emergency loans are available in smaller amounts. If you want a larger loan, you will likely have to turn to other funding sources.
Alternatives to Emergency Loans
Emergency loans are not the only option to help you when you need immediate funding. Other options to explore include:
- Emergency savings: Ideally, you should build an emergency savings account that you can draw from. This can help you avoid borrowing costs. Many experts recommend saving three to six months’ worth of expenses in an emergency savings account.
- Borrowing from friends or family: One way to get money quickly for little or no expense is to borrow from your friends or family. The downside of this strategy is that it could affect your relationship with that person, especially if you don’t repay the funds.
- Home equity line of credit (HELOC) or home equity loan: Homeowners can borrow against their home equity with products like HELOCs or home equity loans. While these options might provide some temporary relief, your home debt will increase and you will potentially put your home at risk if you cannot repay the loans.
To start an emergency fund, set up automatic deposits into a separate account every pay period (consider a high-yield account for extra interest), and let it grow. If you do borrow from it, replenish the funds as soon as you can.
What Is the Minimum Credit Score Needed to Get an Emergency Loan?
Minimum credit score requirements vary by lender. In some cases, you may only need a fair credit score (580 and above), but other lenders might only work with people who have good credit (670 and above).
How Quickly Can You Get an Emergency Loan?
Emergency loans are intended to provide fast funding, and you may even find some same-day loans. Timing really depends on the lender and when you submit your application. For example, applying early in the day mid-week rather than late Friday afternoon of a holiday weekend can help you get your loans faster. Also, be sure to fill out the application accurately and provide the necessary documentation for a faster process.
How Quickly Do You Need to Pay Back an Emergency Loan?
Emergency loans can have a wide range of terms—it depends on the type of lender you work with and the amount of money you’re borrowing. In general, personal loan terms can range from two to seven years. If you’re using a short-term lending product like a payday loan or title loan, the timeframe will be shorter, such as within two weeks or 30 days.
How Much Could an Emergency Loan End up Costing?
When you need cash quickly, you can expect it to come with a steep cost. The cost will depend on the loan type and your credit status, which determines what the interest rate will be. Some loans may also have fees.
The Bottom Line
In life, unexpected things happen, but it’s important to carefully consider your options before taking out an emergency loan. Emergency loans can be costly, increase your debt, and add to your monthly expenses. Having a payback plan can help you successfully pay back your emergency loan. Once you get through your setback, try to create an emergency fund so that you’re better protected in the future.
Read the original article on Investopedia.