What are emergency loans?
A personal loan to pay for an emergency expense is called an emergency loan. Unsecured emergency loans are those that the lender uses to assess your credit and income to decide if they will offer you a loan.
Annual percentage rates for emergency loans range from 6% to 36%, and loan amounts can be as low as $1,000 to $100,000. For this type of loan, lenders typically require a minimum credit score and a maximum debt-to income ratio. You may be able to get a loan with co-signer, secured or joint participation from some lenders.
Even in emergency situations, it is worth taking the time to compare personal loans with potentially cheaper options. This will help you save money and avoid bad lenders who can damage your credit score and finances.
What is the process of emergency loans?
Personal emergency loans are a type installment loan. You receive the money in one lump sum, and then repay it monthly. The repayment terms range from two to seven year. Fixed interest rates are used for these loans. This means that you will have the same monthly payments throughout the loan’s life.
Reputable lenders will report loan payments to all three major credit bureaus. This helps your credit score. Missed payments can damage your credit score.
There are other types of emergency loans
After exhausting all other options, high-interest loans such as pawns, car titles, and payday loans should only be considered. Although these emergency loans are quick and easy to obtain, they can cause long-term financial harm.
No credit-check installment loans There are some similarities between payday loans and auto title loans. These loans are available online as well as in stores. They don’t look at your credit history or credit score to determine if you can repay the loan. This is why many lenders charge higher rates than 100% for no-credit-check loans.
These loans have repayment terms that may be extended than you need. This can lead to high interest rates over the life of the loan.
Pawn Loans: Pawn loan require that you hand over valuable items to a Pawnshop. The shop will assess the item and give you a loan amount. The loan must be repaid, along with interest. Otherwise, the pawnshop will retain your item. This type of loan can have an APR exceeding 100%.
You could end up borrowing again from the Pawnshop if you are unable to repay the loan.
Title loans for cars: A lender will assess the vehicle’s value and loan you a portion of it. The lender will hold the car title until you accept and then you get your loan. Lenders don’t typically review your ability repay the loan, and they can charge APRs up to 300%.
The lender can take your vehicle if you are unable to repay the loan.
Payday loans: These are short-term, high-cost loans that can be risky even in emergency situations. Payday lenders may charge fees up to 400%. They don’t verify your credit and won’t confirm your ability repay the loan.
Borrowers who can’t pay back the loan on their next payday are more likely to borrow again. This causes them to fall into a cycle.
Uses for emergency loans
Lenders may be curious about why you are borrowing. However, there are no restrictions on how much you can spend an unsecured loan. These are some examples of emergency situations that you can get a personal loan for.
- Dental and medical bills.
- Home repairs.
- Car repairs.
- After a loss in income, bills
- Unexpected travel expenses
How to choose an Emergency Loan
Calculate your monthly payment. Consider how the monthly payments will affect your budget. Determine if you are able to afford it. To see the impact of the rate and repayment terms on the monthly payment, use a personal loan calculator.
Compare interest rates. The loan that has the lowest APR is generally the most affordable overall. To compare emergency loans with other financing options, you can use APR. Although a loan with a long repayment period may be appealing due to its low monthly payments, it will also cost more in total interest. You should look for a loan with affordable monthly payments and reasonable interest rates.
Look for fees. An origination fee is the most common fee for a personal loan. It can range from 1% to 10% of your loan amount and may be deducted from the loan funds before you receive the funds.
Find out about funding speed. Consider a lender who offers quick funding if you have an urgent need for funds. While some lenders will fund loans within a day or less, others may take as long as a week to approve. The timeline is often disclosed by online lenders in FAQs or blogs.
How to get an Emergency Loan
Your credit score is important. Lenders will prioritize credit scores when making a loan decision. Before applying for a loan, make sure to check your credit report and fix any errors or past-due accounts. You can view your report from all three credit bureaus at AnnualCreditReport.com.
What can you afford? To determine the monthly amount you can afford to repay the loan each month, review your monthly budget. This will allow you to compare loan offers and choose the payment that is most affordable.
Compare offers and pre-qualify. Even if it is urgent, it’s worth taking the time to compare rates on loans that you will be repaying for at least a year. Pre-qualifying online is a common option for lenders. This allows you to see the rate, amount, and repayment terms. It takes only a few minutes to pre-qualify online and your credit score will not be affected no matter how many times it is done.
Get all the documents you need and submit your application. After you receive a loan offer that offers affordable monthly payments, gather the documents necessary to apply for a personal mortgage. These documents usually include W-2s, pay slips, proof of address, and a government-issued ID. Although you could receive an approval decision immediately, it is more common for it take several days.
How to get an Emergency Loan with Bad Credit
Although a low credit score (below 680) does not automatically make you ineligible for a loan, many lenders will consider your credit score when evaluating your application.
These are some tips for getting an emergency loan even if you have poor credit.
- You can add a cosigner or borrower to your account. This will increase your chances of getting a rate or qualifying for it. Co-borrowers have equal access to funds while co-signers do not. The co-signer, or co-borrower, is responsible for loan payments if you are unable to pay.
- Add collateral: Lenders offer secured personal loans. They consider collateral, usually a vehicle or bank account, when considering an application. Although adding collateral may increase your chances of being approved, the lender can still take the collateral if there are too many missed payments.
- Add up your income streams: Another important aspect of your application is your monthly income. Lenders want to see that your income is sufficient to cover your monthly expenses and pay the loan. They also want to see that you have some money left over. Lenders often consider Social Security, Alimony, or Child Support as part of your income.
Where can I get an emergency loan?
- Online lenders Online lenders allow you to compare your rate before applying. They also offer fast applications. However, predatory lenders may try to take advantage of your situation. Look for a lender with a reputation that has capped rates at 36%, which is the lowest APR available on loans. Also, review your income and credit to make sure you can repay the loan.
- Banks Most banks prefer borrowers who have good credit (or higher) but there are exceptions. U.S. Bank, Bank of America and Bank of America offer small loans that can be used to cover emergency situations. This type of loan is only available to existing customers. However, the fees are significantly lower than those charged by payday lenders.
- Credit unions Members of Credit Unions may be eligible for the most affordable emergency loan. Personal loan APRs are lower than online lenders when personal loans are capped at 18% by federal credit unions. To make a loan decision, a credit union might consider the applicant’s credit history and income. Payday alternative loans are small-dollar loans that can be repaid in six to twelve months.
Alternatives to emergency loans
There are cheaper alternatives to borrowing, but they can be slow and not always convenient. Sometimes you will need to ask for help. NerdWallet recommends that you exhaust all options before taking out a loan, even in emergency situations. These are some alternatives to an emergency loan.
- Local charities, religious groups, and nonprofits can help you.
- Consider income-driven hardship plans or payment plans as options to help you pay your medical bills.
- Ask your employer to provide an emergency loan or a paycheck advance. Or, you might consider using a loan application like Earnin or Dave.
- To split a purchase into smaller, sometimes biweekly, payments, you can use a “buy now and pay later” app.
- If you feel comfortable, ask your family and friends to lend you money through lending circles or a family loan.
Tips to build an emergency fund
Although it won’t cover your immediate needs, an emergency fund can be a great way to avoid borrowing in the long-term. These are some tips to help you build an emergency fund
- Determine how much money you need. Financial experts recommend that you save three to six months of living expenses. To determine how much money you would need to live comfortably, use an emergency fund calculator.
- Start small. It can be daunting to plan for three to six months of expenses if you start from zero. You may find it easier to start with $500. This can be used for smaller emergencies and then work your way up. You can start small and save more each month.
- Save time and money by automating your savings. Many banks offer the ability to set up recurring transfer from your checking account to a savings account. Direct deposit is an option offered by your employer. Have them deposit a portion of your paycheck into another account.
NerdWallet reviews personal loans from over 35 financial institutions and rates them. Interviewing company representatives, we collect more than 45 data points and compare each lender to others who offer similar personal loans. NerdWallet editors and writers conduct an annual fact check and update, and also make any updates throughout the year.
Lenders that provide consumer-friendly features are awarded points by our star ratings. These include: flexible payment options, quick funding times, customer service, reporting to credit bureaus, financial education, transparent rates and terms, low interest rates with no fees, and easy pre-qualification. We also take into account regulatory actions taken by agencies such as the Consumer Financial Protection Bureau. These factors are weighed based on how they affect consumers’ experience and which are most important.
This method applies to lenders who have a maximum interest rate of 36%. That is the maximum rate that most financial experts and consumer advocates consider affordable. NerdWallet is not compensated for its star ratings.