Key Takeaways
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When you apply for an emergency loan, a lender usually runs a hard credit check to review your credit history and reports, which temporarily lowers your credit score.
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Making on-time payments on an emergency loan can help you improve your credit over time.
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Receiving an emergency loan can give you a better credit mix (different account types) and improve your credit score if you pay it on time and in full.
Before taking out an emergency loan to cover unexpected expenses, consider how it could affect your credit. Taking out an emergency loan, like any other type of loan, will have some impact on your credit score. However, it doesn’t necessarily have to be a big negative. If you manage the loan well, it can even help boost your credit score in the long term.
How emergency loans affect credit
Emergency loans are usually unsecured personal loans. Just like with any other loan, taking out an emergency loan requires a hard credit investigation from the lender. This can cause a temporary dip in your credit score. But taking out a loan can also help improve your credit score if you make on-time payments.
Here are all the ways you can expect an emergency loan to impact your credit score.
Creates an inquiry on your credit report
When you apply for a loan from a lender, they do a so-called hard investigation into your creditworthiness. This means that the lender requests your credit information from the credit bureaus to understand your credit history and determine whether they will lend you money.
A hard inquiry will cause your credit score to drop in the short term (usually for a few months) and will typically remain on your credit report for two years. Submitting too many applications at once could mean to lenders that you are applying for multiple loans at the same time and they may think you cannot pay them all back.
Can contribute to a positive payment history
If you can make on-time payments, taking out an emergency loan can improve your credit score by giving you a strong payment history. Payment history accounts for 35 percent of FICO credit score calculations, making it the most important factor.
Gives you a better credit mix
Your credit mix also affects your credit score, accounting for 10 percent of your score. Credit mix is the variety of account types you have in your loan portfolio. Having different types of credit accounts open – such as credit cards, personal loans, car loans and mortgages – contributes to a better score. If the emergency loan you take out is a new type of loan for you, it can help improve your credit mix and increase your credit score.
Debts may arise that you cannot repay
If you take out an emergency loan without the money to pay it back, your credit score will likely be negatively affected. Just as making on-time payments contributes to a strong payment history, late payments or no payments at all contribute to a poor credit history. This can lower your credit score.
Minimum credit score for an emergency loan
Credit score requirements generally vary by lender and loan type. Typically, though, you need at least fair credit — a FICO score of 580 to 669 — to qualify for an emergency loan. The better your credit, the better the interest you will get on the loan. A good FICO credit score is between 670 and 739, and very good credit scores are 740 or higher.
While better credit is beneficial, it is possible to get an emergency loan with bad credit. Options will be limited and interest rates will likely be much higher than those of countries with better credit scores. Make sure you can repay any bad credit loan you take out. Don’t make the decision to take out an emergency loan if it will negatively impact your financial health as it will likely worsen your situation in the long run.
Other Eligibility Requirements
While your credit score is important, there are other factors that lenders examine to decide whether to grant you a loan. Lenders look at several factors to determine whether you appear capable of paying off the loan in a timely manner. These are some of the most common eligibility requirements:
- Sufficient income: The lender wants to ensure that you earn enough money every month to pay off the loan. They want to see pay stubs or anything that shows your income level.
- Overview of monthly expenses and payments: Lenders also consider your debt-to-income ratio (DTI). This shows how much you owe each month versus how much you earn each month. If you have a high income but also high debts, the lender may decide not to approve your loan.
- Proof of identity: This allows you to show the lender who you say you are and allows them to verify all your other information.
- Proof of address: A stable address shows that your living situation is stable and makes you more favorable to the lender.
The bottom line
Whatever your emergency, an emergency loan will impact your credit. Consider the pros and cons, evaluate your situation, your needs, and the eligibility factors to determine if applying for an emergency loan will work for you. Consider alternatives, such as a home equity line of credit, a loan from friends or family, or a credit card with a 0% APR, if an emergency loan seems unmanageable.
