What is an Emergency Loan?
Personal loans to cover unexpected expenses are called emergency loans. These loans are available to help pay for unexpected expenses, such as medical bills or funeral costs. When you have emergency expenses, it is likely that you won’t have the time to wait for your loan. Therefore, search for lenders that offer loan disbursement in a matter of minutes.
The two main types of emergency loans are secured and unsecured. Secured loans require that you use your vehicle as collateral. Unsecured loans are granted on the basis of your creditworthiness only and don’t require collateral good for emergencies
6 Types Emergency Loans
There are many kinds of emergency loans. Some include traditional installment loans while others can be more expensive and have exorbitant interest rates. Know the difference between each type and what fees to expect before you apply for a loan.
1. Personal Loans
Personal loans are offered by banks, credit unions, online lenders, and other financial institutions. They can be paid back in installments over a set period of time. They are generally secured and the loans can be repaid over a period of years. Fees and interest rates can vary widely between lenders. However, your credit score and income will determine your rate. The average time it takes for disbursements to occur is between one and three business days. Compare rates from multiple personal loans lenders to get the best rate.
2. Payday Loans
Payday loans can be a great option when people have bad credit and need fast loans. Payday loans allow for short-term loans of relatively small amounts. Kim Cole is the community engagement manager at Navicore Solutions. She says that this agency offers short-term loans for as low as $300 to $1,000.
Cole says, “However they can become ugly is their interest rate and fees.” Payday loans for emergency purposes can create a vicious cycle. APRs can reach as high as 400%. Cole said that this product is probably the most expensive and least user-friendly.
You repay the payday loan in a lump sum at your next payday. This usually happens within two to three weeks of the loan being issued. The lender will often require you to write a postdated check for the full amount owed. They will cash your check on the due day regardless of how much money they have in your account. If you cannot afford to repay the loan, you can roll it over into a second loan.
3. Car title loans
For those who need quick loans to cover bad credit, a car loan can be another option. Car title loans can be used to get short-term loans up to $2,500 with high fees and interest rates. While payday loans are unsecured and car title loans are secured with the vehicle’s title, they can also be used as collateral.
Arevalo warns: “If your title loan is not paid on time, you risk losing your vehicle and title.” It is your transportation, your way to work or to the doctor. He also said that there was always a risk.
4. Cash Advances
A cash advance can be a great way to quickly get funds for existing credit cards. This allows you to access cash via your bank account or an ATM using your credit card. The cash advance can also be paid back with your credit card.
Be aware that cash advances have higher APRs than purchases. Credit card companies charge higher APRs for cash advances. The cash advance fee is typically a percentage.
Cole says, “Credit card cash advances aren’t my first choice.” Cole states that a credit card or cash loan with 25% interest is better than payday loans at 400%.
5. Payday alternative loans
You might be eligible for a Payday Alternative Loan (PAL) if your emergency loan needs are not met by predatory payday loans.
Credit unions often offer PALs in order to provide members with an alternative to getting payday loans. You can typically borrow between $200-$1,000 and have up to six months to repay the loan. According to the National Credit Union Administration (NCUA), the maximum interest rate federal credit institutions can charge on PALs amounts to 28%. It’s still quite high but significantly lower than the rates that you can get with a payday or car title loan.
6. Loans from Pawn Shops
A pawnshop will allow you to use items as collateral. Any item, including jewelry or gaming systems, can be used as collateral to obtain a loan. You can exchange the item for cash at the pawnshop. The item will be yours if the loan is paid back by the due date. If you don’t pay, the pawnshop keeps the item and can resell them to recover its money.
You will often find a lower interest rate on pawnshop loans than you would on emergency loans. If you don’t pay the required monthly payments, you may lose the item that you pawned. Cole said that while Pawn shops might not be the best option, they aren’t as bad for your finances as payday loans and car title loans. The thing about a Pawn Loan is that you won’t get the value of the item. The pawn industry, however, is tightly regulated in comparison to another predatory lending,” she states.
How to select an emergency loan
The following are important factors to consider when choosing the right type of emergency loan for you.
- Annual Percentage Rate (APR) An APR refers to an interest rate that includes all fees associated with a lending product. APRs may reach triple-digits on some forms of emergency loans such as car title loans or payday loans. It is possible for interest to accrue quickly and you may end up paying three to four times the amount that you borrowed originally. Pay attention to the loan disclosure and understand the APR. This will help you determine the total cost of repayment. The National Consumer Law Center recommends that small loans not exceed 36% because this gives you the best chance of paying your loan.
- Repayment term: Depending upon the type of loan, you may have weeks, years, or months to repay it. With payday loans and auto title loans, your repayment time is usually between two and four months. Personal loans, PALs, or cash advances are more flexible and can be repaid over many months, or even years.
- FeesEmergency loans are subject to any fees, including origination charges. These fees can make it difficult to get rid of debt and increase your loan’s overall cost.
- Collateral Personal loans, cash advances, and personal loans are unsecured. However, some emergency loans are secured and may require collateral. If you default on your repayments, the lender may take your property. Be sure to have a written repayment plan and budget in place before applying for a loan that is secured.
- How long does it take to get funds? This is one of the main reasons why payday loans are so popular. This is a major advantage over personal loans, which can take several days. However, some personal loans lenders and PALs can disburse loans quickly so make sure you shop around until finding the right fit.
- Loan Maximum: Most emergency loans can be as small as $200 up to $1,000. Personal loans can be a good option for those who need more, as they typically have higher loan limits.
- Credit requirements credit is good to excellent, you have many more options than those with poor credit. Personal loans can be approved for with low-interest rates. The loan can be repaid over many years. Emergency loans for bad credit are more expensive and have shorter terms.
How to get an Emergency Loan for Bad Credit
It is possible to have difficult times finding a lender who will work with you if you have poor credit. There are many ways to increase your chances of getting a loan.
- Add Cosigner: A cosigner is someone who has excellent credit and can provide income. This could help you to get approved for a loan even if your credit isn’t great. Cosigners can be required to make the payments, and the lender will require them to act as a guarantor.
- Use CollateralIf your credit score isn’t good enough to get an unsecured, emergency loan, you may qualify for a secured loan. As collateral on a loan, you can use your boat, car, or motorcycle.
- Visit the Credit Union: Credit Unions, which are non-profit institutions, serve their members. Credit unions are often less restrictive than other lenders in terms of credit requirements and can offer free financial counseling.
5 Loan Options Available in an Emergency
These alternatives are better than turning to debt to manage an emergency expense.
1. Ask for Assistance
Although reaching out to your friends and family for financial assistance may be difficult, it’s a better solution than using predatory, high-interest loans. Cole says, “Borrowing from relatives doesn’t always feel like a good thing. But, if you want to make the difference of being evicted from an apartment, I suggest looking at family.”
If you do ask for money, ensure you know if the money you receive is a loan or a gift. Discuss repayment terms. You should also discuss whether you must repay it with or without interest. And what payment terms do they expect.
2. Apply for a 0% interest credit card
You might be eligible for a credit card with 0% interest if your credit score is good to excellent. Some credit cards offer 0% APR intro rates for 12 to 18 months. If you are able to pay off your balance by the end of the 0% interest period, you will not be charged any interest. You should be aware that high credit card APRs may apply to any balance not paid within the intro period.
3. Contact your local Non-Profit Organizations
Depending on where your home is, there might be non-profit credit associations or social service organizations that offer low-interest loans and financial assistance.
Arevalo states that “I always recommend people look for resources in the local area like 2-1-1 and local charities, churches or rescue funds.
You can contact, text, and email 2-1-1 for referrals to local programs.
4. Request a Pay-Advance
If you are currently employed, please contact your employer’s HR or payroll department. You may be eligible for an advance in pay and receive a portion of your next paycheck sooner.
5. Ask Your Creditors for Forbearance
If you are having difficulty paying your bills or need immediate assistance, you can reach out to your creditors and tell them about your situation.
Arevalo recommends to Arevalo that you speak to your creditors and ask them if they would be willing to forbear or defer payment. He states, “Even though it may be short-term it can help free up some funds.”
Avoid emergency loans
If you’re faced with an emergency situation, it can be overwhelming to take the time to research. According to the National Consumer Law Center (NCLC), it’s important to know the true cost of any loan. It is much more difficult to get rid of debt if you have high-interest rates. In the end, you may end up owing thousands.
Securing loans isn’t necessarily bad. But, make sure you fully understand the risks before applying for one. Secured loans are not necessarily bad, but you should be cautious about using collateral that is important in your everyday life. A loss of your car or your home could lead to more problems.
Building an Emergency Fund
After dealing with an unexpected expense you can focus on improving your finances by setting up an emergency fund. You will be able to avoid the need for payday loans or other short-term cash by having money available to cover unexpected costs.
Arevalo states that the slow, steady method is the best for starting an emergency fund.
“Set up automatic savings. He advises that you pick a realistic and affordable amount. “Even a small amount such as $25 or $50 per paycheck can add up,” says he.
Consider meeting with a non-profit credit counseling agency to help you create a budget or pay off debt. For a personalized plan for your finances, you can work with a counselor.