What Is an Emergency Loan?
An emergency loan is typically a personal loan that offers fast approval and funding for quick access to cash.
"While every lender is different, obtaining a personal loan can be very fast," says Barry Rafferty, senior vice president, capital markets at Achieve, a digital personal finance company.
An unsecured personal loan can be better than a payday or title loan, but you shouldn't expect low interest rates with bad credit. A good rate for a 24-month personal loan falls under the national average of 10.16%.
What are the different types of Emergency Loan
- Personal loans. Lenders determine eligibility, interest rate and loan amount based on your credit history and your credit score. Personal loans are often unsecured, meaning they don't require collateral.
- Payday loans. These short-term, high-cost loans carry fees that can equate to an annual percentage rate of about 400%, according to the Consumer Financial Protection Bureau. Lenders don't check your ability to repay, which can create a cycle of debt.
- Title loans. You use your car, truck or motorcycle as collateral for a loan that is 25% to 50% of the vehicle's value but must hand over the title until you repay the loan, according to the Federal Trade Commission. Lenders may give you 30 days to pay, charge finance fees that translate to APRs of about 300% and repossess your vehicle if you can't repay your loan.
- Credit card advances. A cash advance from your credit card allows you to borrow money from the card's line of credit, but an advance comes with fees and higher interest rates than regular card purchases. Your limit on a credit card cash advance is typically lower than your card's limit, and an advance begins to accrue interest immediately.
- Pawnshop loans. You won't need a credit check, but you will need an item of value as collateral that the pawnshop will sell if you can't repay your loan. If you can't repay your loan by the due date, you may be able to extend it or renew it by paying a fee or the interest that has accumulated.
- No-credit-check installment
loans. Lenders will consider other
factors for approval, such as income and employment history. These loans
can offer fast access to cash, but the downside is high APRs.
A bad credit score doesn't mean you can't qualify for an emergency loan, but you may need to prove that you have enough income to repay a loan or apply with a co-signer or co-borrower.
"For those without good credit, a co-borrower with very good credit can be a huge help in securing a personal loan," Rafferty says.
Each lender has its own policies for determining eligibility for an emergency loan, says Tim Schlueter, vice president, head of lending at Avant, a financial technology company.
"The good news is that there are many lenders, and most consumers should have a handful of options available to them," Schlueter says.
Your debt-to-income ratio is a major factor for approval. It tells the lender how likely you are to make payments on the loan along with other debt obligations. A DTI ratio of 43% – meaning 43% of your income goes to debt payments each month – is generally the ceiling for most loans.
The lender may also consider your credit score for approval but may or may not publish minimum credit score requirements for bad credit emergency loans. Some lenders will accept a FICO credit score as low as 520, and others have no minimum credit score. One caveat is that if you qualify with a low credit score, the lender may charge you a high interest rate to compensate for the risk of default.
"There are many lenders who will lend to a consumer with a poor credit score, but interest rates will be high," Rafferty says.
Bad credit borrowers could pay an APR approaching 36%, and loan amounts may be limited. If you're not sure whether you'll get approved, look for lenders that allow you to prequalify with a soft credit pull that has no effect on your credit score.
In an emergency, you may be tempted to take the first loan you can find. But spend the time to compare loan offers.
"Respectfully, most of them are pretty bad, so I'd focus on which one is going to give you the lowest interest rate, understanding that none of the interest rates are going to be good," Ulzheimer says.
Research your options, particularly before choosing a costly payday loan or title loan, given the higher interest rates, Schlueter says. He recommends first seeing whether you are eligible for a personal loan.
Consider important factors including APRs, repayment terms, penalties and fees, qualification requirements, and the approval and disbursal processes. Make sure you get the best deal possible on your emergency loan by looking at:
- Cost. Expect to pay interest charges and fees for an emergency loan, and the APR includes both. Interest rates typically range from 6% to 36%, according to Experian. Many personal loans have an origination fee of up to 8%, though some lenders don't charge this fee, and others offer autopay or relationship discounts.
- Terms. Compare how much you can borrow with how long you have to pay it off. Be sure you can get enough to cover your expense, but avoid taking more: Some lenders may have a minimum loan amount that exceeds what you need. Consider whether you can comfortably afford the monthly payment or whether you should extend the term length to lower your payment, Schlueter says.
- Speed. Some lenders work faster than others. If timing is critical to the day, find out whether the lenders you're considering can deliver funds on time. Borrowers typically wait one to seven business days to receive a personal loan, according to Rocket Loans.
- Approval. Consider your likelihood of approval based on the lender's requirements. What is the lender's credit score and DTI ratio criteria, and does the lender accept co-signers or co-borrowers? Find out whether you can prequalify for a personal loan without hurting your credit score.
- Reputation. Know what you're getting into by checking reviews, ratings and formal complaints about the lenders you're considering. The Better Business Bureau, Trustpilot and the Consumer Financial Protection Bureau's Consumer Complaint Database are good places to start.
Make sure you explore alternatives to an emergency loan before you apply for one. An emergency loan isn't the only solution when you're financially stressed and you need cash quickly for an unexpected expense. Some other options:
- Use a credit card. But carrying a balance could make credit cards a more expensive choice than an emergency loan unless the charge is small enough to be paid off relatively quickly.
- Ask for a paycheck advance. Your employer might be able to pay you ahead of schedule to help you through a difficult time.
- Borrow from insurance or retirement. Most retirement plans and some life insurance policies allow you to borrow from your account, Rafferty says. But you can face tax penalties for early withdrawals from a retirement account, and you are depleting the funds you have to live on later and distribute to beneficiaries.
- Ask for help from friends or family members. Make sure everyone is clear about the terms to avoid strained relationships.
- Reduce your medical bills. If you can't afford to pay a big bill upfront, reach out to the medical office and explain that you're in a bind. The hospital or facility may be able to put you on a payment plan or reduce your payments.
- Ask about hardship programs. If you're struggling to pay a loan or other bill, the lender may offer a forbearance program. The pause in payments may allow you to cover your emergency expense.
What can I use an Emergency loan for?
You can use an emergency loan for nearly any urgent financial need that you can't cover with cash from a bank account. Examples include:
- Medical or dental bills.
- Car or home repairs.
- Unplanned travel.
- Expenses you can't delay.
"People tend to use them to make ends meet on things like utilities and other essential needs," says credit expert John Ulzheimer, formerly of FICO and Equifax.
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