When Is an Emergency Loan a Good Option?

Sometimes emergencies happen in life, and the best advice I have for everyone is to plan as though an emergency will happen sooner rather than later. Start building an emergency fund now, so that you have cash when things go awry and you really need it.

That’s great advice, of course, but it’s not helpful for someone facing an emergency right this moment before they even have the opportunity to start building their own emergency fund. The reality is that we live in a time with high unemployment, and even before that, four out of five Americans lived paycheck to paycheck.

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The best long term solution is to prepare for emergencies, but what are the options in the short term?

In this article

    What about credit cards?

    In many situations like these, people turn to credit cards. This solution offers the big advantage of being incredibly convenient: you just swipe your card or type in your number and the emergency is fixed, for now.

    That big advantage comes paired with some disadvantages, however.

    First of all, credit cards don’t work in all emergencies. They don’t help in identity theft situations, in situations where you can’t solve the problem with a credit card or when the credit network is unavailable (like after a natural disaster). They also don’t help if your card is already maxed out, or if you have poor credit and don’t have one.

    Second, credit cards often come with very high interest rates. There are ways to mitigate this with zero interest balance transfer offers, but it’s still a difficulty to deal with, and if you don’t have strong credit, that option may not be available and you’re just stuck paying a very high interest rate.

    In the end, credit cards are great for smaller emergencies where you can pay it off within a month or two and not accrue much interest on the card. They’re not good for large emergencies, and there are many situations where credit cards may be an unavailable option.

    What about personal loans from friends or family members?

    Another option that many people consider in moments of emergency is borrowing money from family or friends. This has a few really nice upsides, of course. You’ll often get interest-free money this way, and it’s reliant on your relationship, so that money usually comes without any sort of credit check.

    However, as with credit cards, there are a couple of drawbacks.

    One, personal loans from friends and family only work if you have friends and family that trust you deeply and have the resources to loan you that money. The type of relationship where you can ask for a significant loan and honestly expect that the other person will loan you the money must be a trusting one, so you have to have those kinds of trusting relationships in your life to begin with.

    Two, this type of loan has collateral: the relationship with that friend or family member. If you fail to repay that loan, there’s usually no recourse from a friend or family member, except for the fact that you’ve likely permanently damaged that relationship. That person’s level of trust in you is seriously decayed, and it is very hard to gain that trust back. If this is a relationship in which you’ve built up enough trust that the other person will lend you significant money, damaging that relationship is a serious personal cost.

    My advice is to generally avoid personal loans from friends or family members. The risk to those kinds of core, close relationships isn’t worth it.

    What about a home equity loan?

    Another option is to get a home equity loan. A home equity loan is one in which you use your home as collateral for the loan, meaning that if you fail to pay it off, the bank can repossess your home to make good on the loan.

    This comes with the advantage (usually) of a really nice interest rate, but there’s the obvious disadvantage of the fact that your home is at risk if you can’t repay the loan. Of course, this option is only available to you if you are a homeowner and have some equity built up in your home (meaning your home is worth more than what you owe on the mortgage).

    This can be a good option if you’re in a very solid financial and professional situation where you aren’t at significant risk of defaulting on that loan. However, it should be a wake-up call that you should be getting your finances in better order.

    What about selling off or pawning items?

    Another option, of course, is to sell off items in a hurry to get the money you need to deal with the emergency. Many people turn to this because it’s a way to turn whatever possessions you have into cash very quickly and usually without any questions.

    The problem, of course, is that when you sell personal items in an emergency, you rarely get what they’re worth out of them. A pawn shop or collectibles shop is rarely going to give a buyer a large percentage of what that item is worth unless they believe they can resell it virtually immediately. When they buy something from you, they’re taking on the risk of having to hold onto that item until a buyer comes along for it, and that means that they’re paying you less because of that risk.

    Under normal circumstances, when you sell off items, you can wait around until you find a buyer willing to pay a higher price, but in an emergency, you don’t have that time.

    Only use this route if you don’t mind losing a significant portion of the value of items you’re selling off. That’s not a wise financial move, but if you’re selling off stuff that was destined for Craigslist anyway and you get what you want out of them, it’s at least a reasonable move.

    What about personal loans or emergency loans from banks or credit unions?

    A final option to consider is getting a personal loan (sometimes called an emergency loan) from a bank or credit union.

    A personal loan is a loan given to you by a bank or credit union without any collateral, meaning you don’t have to give them anything to guarantee the loan. Instead, the parameters of the loan are based on your credit score. If you have great credit, you can usually get a moderate-sized personal loan for a very reasonable interest rate from a bank or credit union. Here are some great options for emergency loans.

    Personal loans are a great option for emergencies if you have good credit. They provide an avenue for getting a relatively low-interest loan with no collateral that you can use for almost any purpose.

    I’d compare a personal emergency loan to a credit card, actually. They’re both loans you can get with no collateral. The advantage of a personal loan is that the interest rate is usually much lower than a credit card, but the disadvantage is that it takes a little bit of footwork, as you have to actually apply for a personal loan directly.

    Obviously, the drawback is that if you don’t repay that loan, it will significantly hurt your credit. This is true for credit cards as well, of course.

    However, if you’re in an emergency situation, you have a little bit of time, and you have good credit, a personal emergency loan from a bank or credit union can be a really good option. It offers a solid interest rate, doesn’t require any collateral, and doesn’t tap your personal relationships, either.

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    There are lots of options for borrowing money in emergencies.

    • It really depends on your life situation.
    • If you have a bit of time and own your own home, a home equity loan is a very good option.
    • If you have a bit of time and good credit, an emergency loan from a bank or credit union is a very good option.
    • If you need to buy something extremely quickly, a credit card may be able to help.
    • If you have some items of value, selling them off may be an option, but be extremely careful with it and understand that you will likely not get good value.
    • If you have some trusting relationships, you can ask for a personal loan, but understand that you may be risking that relationship.
    • What’s right for you? The answer to that question is the “personal” aspect of personal finance. It depends on the situation of your life.

    Good luck!

    We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

    Trent Hamm

    Founder & Columnist

    Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.