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Emergency Loans: What They are and How to Get One
An emergency loan can be used to pay for expenses that must be covered immediately, with no time to save for them. An emergency loan can be taken out to pay for things such as medical expenses, car repairs or the cost of living in another residence while your home is being repaired or renovated following a natural disaster. So what is an emergency loan? It’s a type of personal loan that is granted almost immediately by the lender so that you can get your hands on some cash when you need it. If you’re in a bind financially at the moment, you may be thinking, “How can I get an emergency loan?”
What is an emergency loan?
In a nutshell, an emergency loan is a type of unsecured loan that is made by a consumer lender for a relatively small amount of money. Of course, the amount that is loaned will vary depending upon your needs and circumstances, but in most cases an emergency loan can be anywhere from $250 to $1,000. Because these loans are unsecured, the interest rate that they charge can be quite costly in many cases. There are also secured emergency loans that are backed by collateral such as your home equity or retirement savings, but these are much less common than unsecured loans.
[ For You: 7 Ways to Avoid Debt in a Financial Emergency ]
If you were to get an unsecured loan for $1,000 with an APR of 10%, then your monthly payment would be $87.92 per month for one year. You would pay a total of $54.99 on the loan, assuming that you make all of the payments on time.
What should I know about emergency loans?
There are several other factors to consider when you take out an emergency loan. For example, the loan may come with other fees and charges in addition to the interest on the loan itself. Many emergency loans charge an origination fee on top of the interest rate, and then there can be separate charges for late payments or any other violations of the terms of the loan.
If you have a loved one in the hospital that needs medical care that is not covered by insurance, then you may not have much time to shop around for the best deal you can find. You may be forced to accept the terms offered by the first lender you talk to just because they can provide same-day funding. It is a good idea to do a little research on this at a time when you don’t actually need the money. That way you’ll know just where to go if you need to.
Types of emergency loans
This type of loan is usually used to pay for medical bills that aren’t covered by insurance or major car repair bills, such as for a new transmission or engine. Other uses for a personal loan include funding for online certification courses or even to cover an emergency house repair. These loans are usually unsecured but can be secured in some cases. Personal loans are offered by a variety of lenders, but they usually charge a higher interest rate than you would pay for a mortgage or home equity line of credit.
Debt consolidation loans
If you have several credit card balances that you’re trying to pay off, then an emergency loan to pay off one or more of these balances may help to boost your credit and help you to stay current with all of your payments. An emergency loan can help you to avoid late payments with their subsequent late fees and strikes against your credit score. You just need to make sure that the new loan that you get from a lender is charging either the same rate of interest or a lower rate of interest as your current debt.
Credit card cash advance
This is one of the most convenient ways to get an emergency loan, as there is generally no underwriting process of any kind. You just go to an ATM machine and withdraw the cash that you need against the limit of your credit card.
But a cash advance with a credit card is also an expensive proposition, as many credit card companies charge higher rates of interest for cash advances along with a litany of other fees. Alternatively, you may be able to just use your credit card to pay for bills if you’re in a bind. That way, you can avoid cash advance fees that your issuer charges.
This type of emergency loan is probably more expensive than any other type of loan. The rates of interest that lenders charge for this type of loan is typically nothing short of outrageous, and they should only be used as an absolute last resort. But if you need money for something that is absolutely necessary (and immediate), then this may be your only option.
[ Read: The Best Payday Loan Alternatives ]
Be aware that payday loans charge up to 400% interest, and usually are paid back on your next payday, which can be two to four weeks. If a payday loan borrower can’t pay back the money in time, they usually roll over the loan into a new one, creating a vicious cycle of debt. Only use a payday loan if all other possible options are exhausted and you’re in a true financial emergency.
Payday alternative loans (PALs)
PALs are available for borrowers who have been a member of a federal credit union for at least one month. The National Credit Union Administration (NCUA) allows federal credit unions to make short-term loans ranging from $200 to $1,000 as an alternative to payday loans. Credit unions are only allowed to charge a maximum of $20 for an application fee, but the interest rates on these loans can still be very high. Some PALs charge as much as 30%, so be prepared for this when you apply. Terms for a PAL can range from one to six months.
What can I use an emergency loan for?
Emergency loans can be used for almost anything. You may need to pay a medical bill for immediate care out of pocket, or your car may need a repair in order to keep running. If someone loses their job and is unemployed, they may also use a small emergency loan to bridge the financial gap until they secure a new position.
Where to get an emergency personal loan
There are several types of lenders that offer emergency personal loans, both in brick-and-mortar institutions and online. If time allows, be sure to shop around to see where you can get the best deal. You may be surprised at the differences in terms that various lenders offer.
Many banking institutions offer emergency personal loans as another way for borrowers to get some quick money. If you have been a customer in good standing at your local bank for a long time, it may be willing to offer you a better rate than any other lender, depending on how much money you need and how soon you need it. If the people who work at the bank know you personally, that may help you to secure better terms on your loan than you could get otherwise.
[ Read: How to Get a Loan With Bad Credit ]
But you may need to have a high credit score in order to qualify for this type of loan. Don’t be afraid to shop around with other banks to see what they offer as well. Another bank may be running a promotional for emergency short-term loans that are a better fit for your situation than what your current bank can offer.
As with most other types of financial products, the terms for emergency personal loans are usually slightly better at credit unions than they are at banks. As mentioned previously, many federal credit unions offer Payday Alternative Loans (PALs) that usually charge less interest than payday loans. The rates on credit union payday alternative loans have a ceiling of 28% as of August 2020, which is lower than even some consumer lenders.
You can take out up to three PALs within a six-month period, but the repayment periods cannot overlap. Credit unions generally offer better loan terms to customers with fair or poor credit than banks do, so this should probably be your first stop if you have been a customer at a credit union for at least a month. If you can qualify for a PAL, then this is probably going to be the best option available in most cases.
In the past few years, there has been a virtual explosion of online lenders that now offer quick cash to borrowers. Some lenders offer unsecured loans while others require some form of collateral. But there are online lenders that will lend as much as $50,000 to those who qualify.
But it is especially important to shop around if you decide to use an online lender. Be sure to read all of the fine print in the loan terms to make sure that you don’t get a nasty surprise of some kind after you get the money. Do some research on the lender to make sure that it is a legitimate lending institution and not some fly-by-night outfit trying to con you.
[ Read: When Is an Emergency Loan a Good Option? ]
How to choose an emergency loan
There are several factors that you need to consider when shopping for an emergency loan. Here is a list of the key items that you need to analyze and compare in order to get the best loan for you.
- Funding time: Some lenders can provide same-day funding while others such as banks or credit unions may take a few days to get you your money.
- Interest rates: Most lenders let potential borrowers check interest rates with only a soft credit pull, which will give would-be applicants an idea of the APR and fees that they would be charged before borrowing. This is a good way to compare interest rates among your top lenders.
- Fees: Most emergency loans come with one or more fees that are charged on top of the interest that you’ll pay. An emergency loan may charge an application fee, an origination fee and additional penalties for late payments.
- Terms of repayment: Some lenders require the loan to be paid back very quickly, while others will give you more time. Generally, a typical personal loan will have terms of two to five years.
- Credit score requirements: Some lenders only work with borrowers with high credit scores, while others cater more to those with fair or bad credit.
Alternatives to emergency loans
There are several possible alternatives to emergency loans that may be available to you if you need to get your hands on some cash quickly. Some of these alternatives include:
- Borrowing from your 401(k) plan: The rate of interest that you’ll pay on this loan is probably lower than what you could get from any other type of loan anywhere, and the best part is that you’re paying the interest to yourself instead of to a lender.
- Borrowing from a friend or relative: If your family is willing to help you out in your time of need, you’ll almost certainly get better terms than you’d get from a lender. Just be sure that you’ll be able to make the payments so that you won’t risk damaging your relationship with your family.
- Use a credit card: If the money you need for an emergency loan doesn’t exceed the limit on your credit card, consider using that instead. It’s not the ideal solution, as credit card APRs can exceed loan APRs, but it would be better than a payday loan. Furthermore, you can always ask your credit card issuer for a limit increase so that you don’t max out the card.
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