Emergency loans: What you need to know

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In a Nutshell

When you need fast cash because of an unexpected expense, you might resort to an emergency loan, which can come with steep costs. Whether you qualify for this type of line of credit depends on your credit health, and overall costs can vary by lender.

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If you don’t have enough in savings to cover an emergency expense, you might be wondering what your options are to cover this unexpected cost.

Maybe you’re considering an emergency loan. If so, you may have a number of options, depending on your credit health.

Whether your car breaks down or you find yourself unexpectedly battling an illness, you may need extra cash to get through. We’ll discuss the different types of emergency loans that could be available to you, and we’ll also give you tips on how to navigate the borrowing process and what other options you may have.


What are emergency loans?

Unlike a student loan or a mortgage, emergency loans can be used for many different purposes.

Emergency loans can come in the form of unsecured personal loans, credit card cash advance loans, payday loans or even pawn shop loans.

Emergency loan funds can be deposited directly into your bank account within a day or two of approval, depending on the lender. To fully understand your options, make sure to do your research beforehand and read any fine print throughout the process.

While an emergency loan may help you get through financial difficulties — according to the Federal Reserve, 40% of Americans can’t cover a $400 emergency — there can be high fees and interest rates associated with some of them, depending on the type of loan you apply for and its terms. For example, payday loans can have steep interest rates, but unsecured personal loans may have lower rates, particularly if you have good credit health.

Types of emergency loans

If you need a loan in an emergency, there are several options to consider. But what type of loan you qualify for can be largely dependent on your creditworthiness.

Personal loans

If you have good credit health, you may qualify for an unsecured personal loan. Personal loans often have flexible uses for emergency situations. Personal loans are typically installment loans given out in a lump sum with a fixed interest rate. They could have better interest rates than credit cards and can be paid back over a set period of time.

You don’t need to borrow a huge amount, either. If you’re in need of a small amount of money, a small personal loan can help. For example, you could get a small personal loan of $1,000 to help you in a time of need. Just remember that you should take out only what you actually need and can comfortably afford to pay back. 

Credit card cash advance

A cash advance is essentially using the available balance on your credit card to take out a short-term loan. The credit card company will typically charge a higher interest rate for cash advances than it does for normal purchases, plus a processing fee. Also, interest will start accruing on the advance when you take the money out, so be careful of how much money you request.

Payday loans

A payday loan is a short-term loan that typically must be repaid by your next payday. Unlike a personal loan, which is typically paid back in installments, payday loans are paid back all at once.

But be aware: Payday loans can have APRs as high as 400%, according to the Consumer Financial Protection Bureau.

The problem with payday loans is that they can lead to a debt trap. Many borrowers might not be able to pay back the loan — and are then stuck in a cycle where they continue to borrow in order to pay off debt. The Consumer Financial Protection Bureau reports that four out of five payday loans are “re-borrowed” within a month — often around the time when the loan is due — so you should only turn to this option as a last resort.

Pawn shop loans

For a pawn shop loan, you typically have to use an item of value to secure the loan. A pawn shop will assess the value of the item and keep it on hand as collateral to back the loan.

If you’re unable to pay back the loan, the pawn shop can sell your item. Because a pawn loan doesn’t involve a credit check or application process, it could be good for those with few traditional credit options.

Title loans

Another option is a title loan. If you’re a car owner, you can use your car’s title as leverage to access a short-term loan. This might seem like an attractive option since there typically isn’t a credit check involved. But there’s a chance your car can be seized if you aren’t able to repay the loan, so this option should be carefully considered.

Alternatives to emergency loans

Before rushing to take out an emergency loan, you may want to consider some alternative options.

Low-interest credit cards

If you have good credit, you could qualify for a low-interest credit card with a 0% intro APR on purchases for a period of time. You could use this new credit card as a short-term loan and pay it back within the promotional period. Just remember that applying for a new credit card will initiate a hard inquiry, which can affect your credit scores. And you should only charge what you know you can pay off within the intro APR period — any leftover balance will begin to accrue interest if it’s not paid off in time.

Medical bill repayment plans

If you have an unexpected medical bill, you can talk to the hospital about repayment options. In many cases, a provider may work with you on a payment plan.

Some hospitals provide financial-assistance options specifically for under-insured or low-income families. Each hospital may have different financial assistance programs, so get in touch to see if you qualify.

Student loan payment restructuring

Federal student loan borrowers may be able to free up some money by opting for an income-driven repayment plan, which may make your monthly payments more affordable. This is a repayment plan that caps your monthly payment at a certain percentage of your discretionary income, which could lower your monthly payment amount. In some cases, you might qualify to pay $0 per month based on your income.

You can also consider deferment or forbearance to free up some money by stopping payments temporarily. Just be aware that depending on the types of student loans you have, your loans may continue to accrue interest while they’re in deferment or forbearance. So while you’re freed from making payments for now, your overall balance that you’ll need to pay back could continue to increase.

Home equity line of credit

You may also consider getting a home equity line of credit — often referred to as a HELOC. If you’re a homeowner, this is an option in which you use your home as collateral when applying for a loan. You’ll want to know the ins and outs of your repayment term, because you might be required to pay back the loan immediately after the draw period or have a set amount of time to pay it back.

Start planning for your next emergency

If you need an emergency loan, you’re not alone: 40% of Americans can’t cover a $400 emergency expense, according to the Federal Reserve. And it’s not just low-income earners dealing with this, either. About 1 in 10 workers making more than $100,000 a year live paycheck to paycheck, according to a CareerBuilder survey.

Although it can be difficult to break the paycheck-to-paycheck cycle, you can start setting aside small amounts of money for emergencies.

Even setting aside $10 each paycheck can help. You can adopt a “pay-yourself-first” model, where you make sure some of your earnings go into a savings account each payday so you’re not tempted to spend more money on discretionary purchases.

Keeping your savings in a separate, high-yield savings account can help make it easier to keep these funds reserved for emergencies. The key is to save what you can consistently, so you have an emergency cushion for the future.

Why everyone should have an emergency fund

Bottom line

No one wants to experience a financial emergency — but it happens. If you need a quick loan, you can consider an emergency loan — but it’s crucial to understand the total cost of this option and how fees and your interest rate can increase the cost.

Knowing what you’re agreeing to and reviewing all of your loan options can help you deal with the emergency and have peace of mind that you’ve made the right decision and can repay whatever money you’ve borrowed.