Key Takeaways
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Emergency loans provide quick access to cash for unexpected expenses, but come with high fees and interest rates.
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It’s important to carefully consider whether an emergency loan is really necessary and explore alternative options, such as budgeting and building an emergency fund.
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An emergency loan should be a last resort because relying on it without making changes to your spending and saving habits can worsen your financial health.
The advantage of an emergency loan is that you quickly have access to cash if you are confronted with an urgent, unexpected expense. Many borrowers choose emergency personal loans because of the ease of qualifying and how quickly you can get the money to pay for expensive vehicle repairs, hospital repairs, medical or dental bills, or other household expenses.
Although they are a convenient source of financing, there are disadvantages such as fees and high rates for bad credit personal loans. Emergency personal loans can be lifesaving when you’re in trouble, but they can also worsen your financial health if you rely on them without changing your spending and saving habits.
Understanding the pros and cons of an emergency loan before you need one can give you peace of mind that you have a backup plan if the unexpected happens.
Benefits of Personal Emergency Loans
Choosing personal loans for emergencies comes with a number of benefits, ranging from fast funding times to a completely online experience.
Fast financing
Most personal loan lenders offer fast approvals with next day financing available. Some even offer same-day financing if you sign up early enough in the day. This ensures that your car is out of the shop faster or that your dentist pays to repair that root canal.
Easy qualification
Most personal loans are unsecured, meaning approval is largely based on your credit score and income stability. This means less paperwork is required, which can be a welcome benefit in an urgent situation.
Stable fixed interest payment
Emergency loan interest rates are fixed, so you don’t have to worry about rate changes like you would with a credit card. When you sign your final paperwork, you will also know the start and end dates of your payment.
Longer repayment options
If you have one to seven years to pay off an unscheduled bill, you may have more payment options. This can be a big relief if you are still recovering from a medical emergency or if you have to miss work because your car is in the garage.
Accessibility
You don’t need perfect credit to get approved for an emergency loan, and you may qualify with scores as low as 300. Although the APRs for bad credit loans are as high as 36 percent, they are much cheaper than the 400 percent APRs that you will find on payday loans.
Less impact on your credit score than revolving debt
Unlike credit cards, personal loans are installment loans, and taking out a loan will not affect your credit utilization ratio. Your credit utilization ratio is based on the portion of your total revolving credit that you have used, and does not take into account installment loans.
Disadvantages of emergency personal loans
Despite their flexibility and fast funding times, emergency loans also have drawbacks that you should consider before applying.
Costs
Lenders may charge origination fees that can be as high as 12 percent of the loan amount. Some even impose penalties for early repayment. Depending on the lender, you may also pay late fees, overdraft fees, and other fees.
No payment flexibility
You cannot pay lower than what is stated in your loan agreement. Once you choose a repayment term, you’re stuck with it until it expires or you refinance.
Interest rates
You may pay a higher interest rate than a credit card if you have a very low credit score. Read the fine print: Some alternative personal loan providers can charge triple-digit APRs.
Requires a stable income
Because most personal loans are unsecured, your income must be consistent for approval. You may not qualify if your seasonal, tip or commission income varies significantly.
Can become a stopgap for bad savings habits
Consumers often turn to emergency personal loans because they don’t have money saved in an emergency fund. In fact, the Bankrate Emergency Fund Report shows that 53 percent of people have less than three months of rainy day savings.
Can lead to dependence on debt
The ease and speed of obtaining personal loans makes it tempting to use them when money is tight. Debt should always be a last resort – rather than a first resort in an emergency.
When an emergency loan may be necessary
There are times when getting an emergency loan makes sense. This is especially true if paying cash for the emergency would deplete your savings and leave you unable to pay basic bills like rent, groceries, or car utilities.
- Unexpected repairs to your home that affect the safety of your home. A roof leak in the rainy season, an air conditioning failure in the summer or a heating failure in the winter often require repair costs that can quickly run into the thousands of dollars. An emergency personal loan can cover some or all of the costs.
- Car repairs. If you live somewhere without good public transportation, a working car is an absolute must. Major car repairs quickly become pricey and temporary transportation costs like Uber become expensive. With an emergency loan you can get back on the road faster.
- Dental work. Unfortunately, even the best dental health insurance policies do not fully cover every type of dental work. An emergency repair of a crown or broken tooth can cost thousands of euros, making an emergency loan necessary.
- Personal tragedies. Although some airlines offer funeral fares, the cost of flying across the country with your family to attend a loved one’s funeral can add up. An emergency loan can give you more time to repay the loan while you grieve the loss.
When an emergency loan should be avoided
The last thing you want to do is borrow money with average rates in the double digits that you don’t really need. There are some scenarios where it just doesn’t make sense.
- It’s a wish, not a necessity. You may be stressed and feel like you urgently need to get out of town to relax, but that’s not a must. Emergency borrowing should be reserved for costs that keep you from working, eating, being healthy, or having a safe place to live. Everything else is probably a need.
- You’re going to change jobs. A personal loan is approved based on how much you earn now. If you want to change careers or jobs, skip the personal loan or use a credit card. The credit card minimum payment option gives you a lower payment while you look for a job or wait for your first paycheck at your new gig.
- You have an emergency fund. This may seem obvious, but the purpose of an emergency fund is to use it when something urgent happens. Don’t be afraid to use it. While it can be scary to taper off, it will be much cheaper than paying 24 to 84 months of interest on an emergency loan. Make sure you take steps to save and replenish the money as quickly as possible.
Alternatives to an emergency personal loan
Whether you’ve been turned down for an emergency personal loan due to credit issues or would rather explore other options before applying, there are some alternatives to consider.
- Use a credit card you already have. An existing credit card can be your best friend if you have credit. Just make sure you pay it off as quickly as possible to avoid a drop in your credit score.
- Check out cash apps. You could potentially receive up to $750 of your next paycheck if you qualify for a cash app. Some of these apps are free or offer the option to pay optional tips. However, if you need money immediately, you can pay a small amount or subscription fee to use the app.
- Borrow from friends or family. Contact friends or family members and ask if you can borrow the money you need. They may be willing to give you a small, short-term loan with a low interest rate or an interest-free loan. Make sure you only borrow what you can easily pay back. Also make sure that the agreement is in writing to avoid confusion.
- Contact a local charity or non-profit organization. Call 211 to inquire about the financial resources available in your area. Depending on where you live, you may be eligible for an interest-free loan or subsidy.
- Request a payment plan. Contractors, doctor’s offices and auto repair shops may offer payment plans to help you pay off a large bill. Even if they don’t, it never hurts to ask if they can accept regular payments on the balance instead of all at once.
- Apply for a 0 percent APR credit card. If you have good or excellent credit, you may qualify for a 0 percent APR credit card. These cards do not assess interest on purchases during an introductory period, typically between 12 and 20 months. Be sure to pay off the balance in full before the promotional APR period ends, as interest begins to accrue, and usually at higher rates than other cards.
- Receive a salary advance. Research your employer’s policy and see if there are specific guidelines for taking an advance.
The bottom line
Emergency loans can be a viable solution for consumers with little money. They are easy to apply for, flexible and offer fast financing times. Still, these loan products have drawbacks, such as higher financing costs, that should not be overlooked when deciding whether they are suitable.
Be sure to shop around and check your prequalification offers from at least three lenders. Compare the loan amounts, terms, interest rates, fees and financing terms for each loan offer you receive. It is equally important to evaluate each lender’s reputation and customer service ratings in order to make an informed decision.
Most importantly, crunch the numbers to determine if an emergency loan is right for your finances or if an alternative, such as a paycheck advance, a payment plan, or a loan from a friend or family member, is a better choice.
