4 types of emergency loans

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If you don’t have enough cash or in your rainy day fund to cover an emergency expense, using an emergency loan can be a great option. Most types of emergency loans can give you quick access to cash. Additionally, some have flexible repayment terms that allow you to make lower monthly payments.

However, not all emergency loans are created equal. For example, while some have lower interest rates for well-qualified applicants, others come with interest rates as high as 400 percent. Before you make a decision, learn how these four popular emergency loans work and consider alternatives.

4 types of emergency loans

1. Personal loans

Personal loans are offered by lenders such as banks, credit unions, and online financial institutions. With a personal loan, you receive money as a lump sum that you repay in monthly installments. In addition to repaying the principal amount borrowed, you also pay interest and fees.

One advantage of a personal loan is that you can repay a large amount over a longer period of time. The repayment periods vary depending on the lender, but can typically be as little as one year or up to seven years for qualified borrowers.

Another major benefit is that you get quick funding – some lenders can get your loan out in as little as a business day.

One major drawback, however, is that if you don’t have such excellent credit, you may have to pay a high annual interest rate (interest plus fees). Some lenders have maximum annual percentage rates that are greater than 30 percent.

Who is this best for: Borrowers looking for lower interest rates than credit cards and high credit limits that do not require collateral.

advantages disadvantage
  • Usually no collateral is required
  • Some lenders have flexible repayment terms
  • You can struggle to qualify for a personal loan when you have poor credit

2. Credit card advances

Credit cards can be useful tools if used responsibly in an emergency. Many credit cards offer a cash advance feature that allows you to conveniently access cash at an ATM or bank branch. The amount of cash you can borrow is limited either by a percentage of your card limit or a set maximum amount.

Credit card cash advances have higher interest rates than the APR on your card. Since the cash advance is tied to the credit limit of your existing card, no additional credit check is required.

Who is this best for: Cardholders who already have active credit cards in good condition and need to borrow small amounts. It could also be an option for existing cardholders whose creditworthiness may not qualify them for a new line of credit.

advantages disadvantage

3. Payday Loans

Payday loans are a type of instant loan that you can use to borrow a small amount (usually a few hundred dollars). The repayment period for these types of emergency loans is extremely short, often within two weeks or until the next payment period.

This type of emergency loan is generally considered predatory because it charges exorbitant interest rates. According to the Consumer Financial Protection Bureau, interest rates of up to 400 percent are typically charged on payday loans.

Who is this best for: Borrowers who need small amounts of money and can fully repay the loan in a short period of time. If possible, payday loans should be avoided; Instead, consider alternatives to the emergency loan.

advantages disadvantage
  • Easy to qualify as most lenders do not require a credit check

4. Title Loans

Another type of emergency loan is a title loan. These are secured loans that use your vehicle title as collateral (hence the name). If you can’t repay the loan by the end of the loan term – typically 30 days – the lender can repossess your car to pay off any outstanding debt.

In addition to using your car to secure the short term loan, title loans have high interest rates that are similar to payday loan interest rates. According to the Federal Trade Commission, interest rates of up to 300 percent are charged on title loans.

Who is this best for: Consumers who want to borrow small amounts and can repay their loans within a month. A title loan can be an option for borrowers who do not have access to other types of emergency loans, but it should be viewed as a last resort.

advantages disadvantage
  • Some lenders do not require a credit check
  • A lender can repossess your vehicle if you default on the loan

Which emergency loan should you take out?

Of the four types of emergency loans discussed above, personal loans offer the lowest borrowing costs.

Although the rate you are approved for depends on your credit history, personal loan interest rates are still incredibly lower than payday or title loans. Personal loan rates currently range from three to 36 percent; the average rate is 10.46 percent as of September 8, 2021.

If an unsecured personal loan is not a viable option, consider looking for emergency loan alternatives.

Alternatives to the emergency loan

1. Home equity loan or Home Equity Line of Credit (HELOC)

If you have built up enough equity in your home, you may be eligible for a home loan or line of credit (HELOC). Based on the estimated value of your home and the size of your first mortgage, you can borrow thousands of dollars.

A home equity loan is an installment loan that offers lump sum financing, a fixed interest rate, and a term of up to 30 years. A HELOC is a revolving credit line that you can use for a specified period of time, e.g. B. 10 years, with a repayment period of up to 20 years afterwards.

Both types of loan use your home as collateral which creates a risk of foreclosure if you cannot repay the loan.

Who is this best for: Homeowners who need large loans for necessary expenses such as home renovations or repairs or training costs.

advantages disadvantage
  • The average home equity loan rates are typically lower than the average personal and credit card rates
  • Requires a certain amount of equity in your home
  • The lender can take your home away if you default on the loan

2. Payment plans

If your urgent need for a loan is due to an unexpected bill, a payment plan is an alternative to the emergency loan. For example, let’s say you have a large medical bill that you can’t pay right away. You may be able to negotiate a manageable payment plan with your provider’s billing or accounting department.

Who is this best for: People who can pay high expenses with lower monthly payments with longer repayment periods. This alternative is ideal because it means you don’t go into further debt.

advantages disadvantage
  • Some payment plans have interest-free periods
  • You may be charged interest or fees

3. Advance salary

Some employers offer paycheck advances, also known as pay advances, through the company’s human resources department. With a paycheck advance, you receive prepayments from your future income. Depending on your employer’s advance pay agreement and the laws of your state, the loan may be automatically deducted from your paycheck in installments.

If your employer offers this benefit, there may be restrictions on the amount and number of advances allowed.

Who is this best for: Individuals in need of small, short term loans who work for employers who offer this loan option.

advantages disadvantage
  • Some employers offer interest-free pay advances
  • Not offered by all employers

4. Friend or family member

Borrowing money from a friend or family member can be a difficult decision. However, it’s an option that can come in handy with unexpected bills. If you have a family member or friend willing to give you an emergency loan, sit down with them to discuss repayment expectations.

Discuss whether they want to be paid in a lump sum or whether installment payments are okay. If the latter, how long are they willing to repay you all of the loan and how much do they expect for each installment? It is also wise to ask if they are expecting any interest on top of the principal amount.

Who is this best for: Those with strong relationships with family members or trusted friends who are willing to help.

advantages disadvantage
  • A family member may charge you little to no interest
  • Late payments can ruin your relationship with the lender

Next Steps

Taking on additional debt to meet sudden expenses can be a difficult situation if you cannot repay the emergency loan. Before considering the types of emergency loans that might make sense for you, the first thing you should consider is whether there is any way to save the cost.

When saving is not an option, look for an emergency loan with the lowest interest rate and borrow only what you need.

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