What is an emergency loan?
An emergency loan is a loan that covers your expenses in an emergency. There are a few types of emergency loans, but they almost always come with very short terms (usually weeks or months) and high interest rates and fees.
While you should try to plan your finances so that you have an emergency fund for unforeseen costs, this is not always possible. Sometimes emergencies arise when you least expect them, and an emergency loan may be the only thing available to tackle an even bigger problem.
Why might you need an emergency loan?
An emergency loan usually has a short term, sometimes as little as a week or two. They are also generally offered to people whose credit is not perfect. The combination of these two factors means that an emergency loan usually has very high interest rates and fees.
If you can, it’s a good idea to put some extra money into an emergency fund before you have an emergency. But if you’re in a tough spot and don’t have emergency funds, there’s not much you can do right now. Some situations that might require an emergency loan include:
- Your car breaks down and if it isn’t fixed, you won’t be able to get to work.
- Your utilities (gas, electricity and water) risk being cut.
- There is something wrong with your paycheck and you are not being paid as expected.
Types of emergency loans
An emergency loan does not have a strict definition; it is a catch-all for short term loans which are meant to be used only in an emergency. Here are some types of loans that could be considered as emergency loans.
A personal loan is an unsecured loan that allows you to access a fixed amount of money without any collateral. You then repay it in fixed monthly installments for the duration of the loan.
Unlike many other types of emergency loans, personal loans generally have a term of a few months to several years. You can usually use a personal loan for almost anything you want, which can make it useful for a range of emergencies.
Cash advances by credit card
In most cases, you use a credit card to make payments directly to a merchant. While this is useful for making purchases in places that accept credit cards, it doesn’t help if you need real money. In this case, you can get a cash advance on your credit card. Be aware, however, that many credit cards charge fees for cash advances AND interest starts accruing as soon as you get your money, even before your next statement.
A payday loan is an emergency loan with a very short term, usually only a week or two. Payday lenders generally market their loans as available even if you have bad credit. Payday lenders will give you money now with the promise that you will pay them back with your next paycheck. These loans usually carry exorbitant interest rates (up to 400%) and should be avoided at all costs.
Car title loan
A car title loan is similar to a payday loan, but instead of being unsecured, it is secured by the title of your car or other vehicle. Using your vehicle as collateral can help reduce the fees and interest you pay since the loan is secured. The downside to a car title loan is that if you don’t pay off the loan, you risk losing your vehicle. This is an incredible risk and should be avoided unless there are no other options.
How to get an emergency loan
The first thing to do in getting an emergency loan is to decide what type of loan you are looking for. Depending on your credit score and your financial situation, you may want to consider a personal loan. Different personal loan lenders offer loans to people with all types of credit scores. Interest rates and fees on personal loans will vary depending on your credit profile and the amount of money you are looking for. Many personal loans can be funded in just a few days. Here’s how to get an emergency loan from a personal lender:
- Gather your documents: You will usually need things like your ID, Social Security number, and proof of income and employment.
- Compare lenders: The time it takes to get the money is important in an emergency, but be sure to compare the rates and terms of several lenders. You can do this by prequalifying yourself, which shows you what you might be eligible for before submitting an application.
- Complete the request: Many lenders have fast online applications and give approval decisions the same day as the application.
Emergency loan alternatives
Here are some alternatives to an emergency loan that you might consider:
- Borrow against the equity in your home: A home equity loan or home equity line of credit (HELOC) is a loan secured by the equity in your home. These loans generally take a few weeks to set up, so they are the best for accessing long term funds.
- Using a credit card: If the emergency you are having can be paid for with a credit card, it could be a faster alternative to an emergency loan.
- Ask your friends and family: If you have friends or family with sufficient funds, they may be able to help you. Set clear expectations for how the money will be paid back, or you risk damaging your relationship.
The bottom line
An emergency loan is a catch-all for a loan that caters to people facing short-term financial emergencies. Emergency loans often have very short terms and high interest rates and fees because lenders know that in an emergency you may not have many options. Try to organize your finances before you experience an emergency so that you are prepared. Creating an emergency fund is a great way to get you started on the path to a strong financial future.