An emergency loan is typically a personal loan that offers fast approval and funding for quick access to cash.
“While every lender is different, obtaining a personal loan can be very fast,” says Barry Rafferty, senior vice president and head of capital markets at Freedom Financial Asset Management, the lending arm of Freedom Financial Network.
An unsecured personal loan can be better than a payday or title loan, but you shouldn’t expect low interest rates. Rates can range from the single digits up to 100%, depending on your credit and your lender, according to the credit bureau Experian.
You can use an emergency loan for nearly any urgent financial need that you can’t cover with cash from a bank account. This means an emergency loan could pay for an urgent medical need, car or home repair, unplanned travel, or other unexpected expenses you can’t put off.
“But people tend to use them to make ends meet on things like utilities and other essential needs,” says credit expert John Ulzheimer, formerly of FICO and Equifax.
- Personal loans. Lenders determine eligibility, interest rate and loan amount based on your credit history and your credit score. Personal loans are often unsecured.
- Payday loans. These are short-term, high-cost loans for $500 or less that are usually obtained from payday loan stores or online, depending on where you live, and repaid with your next paycheck. Fees can be steep, even though many states set maximums ranging from $10 to $30 for every $100 you borrow, according to the Consumer Financial Protection Bureau. A two-week payday loan with a $15 fee equates to a credit card annual percentage rate of about 400%, the CFPB reports. By comparison, APRs on credit cards are between about 12% and about 30%.
- Title loans. You use your car, truck or motorcycle as collateral for a loan that is 25% to 50% of the vehicle’s value, according to the Federal Trade Commission. Lenders require you to hand over your car title, pay a fee to borrow the money and usually repay the loan in 30 days. Some lenders may also ask for a copy of your car keys or make you purchase a roadside service plan if you don’t already have one. Your lender may allow you to roll over your loan if you need more time to pay, but you will pay another fee. You can pay a lot for the loan if you roll it over several times, and eventually you might not be able to repay the lender. If you cannot pay, the lender can repossess your vehicle and may sell it to cover your debt.
- Credit card advances. A cash advance from your credit card allows you to borrow money from the card’s line of credit, but an advance comes with fees and higher interest rates than regular card purchases. You will have not only a higher APR but also no grace period on cash advances with most cards, meaning that interest begins to accrue immediately. Your issuer may subtract a flat fee or percentage from the amount of the advance, or it may be posted to your credit card bill. You can get an advance at an ATM or your bank or with a check from your card issuer. Fees could apply to an in-person transaction at your bank or at the ATM. Check the terms and conditions of your card before you use a cash advance to avoid surprise charges.
Emergency loans are available to most borrowers, assuming that your credit report doesn’t raise red flags, such as delinquent accounts, tax liens and collections. If these aren’t resolved, you may not get approved for an emergency loan on your own but could get approval with a co-signer or co-borrower who has better credit.
“Each lender has their own policies for determining who is eligible for an emergency loan,” says Tim Schlueter, vice president, head of lending at Avant, a personal loan company. “The good news is that there are many lenders, and most consumers should have a handful of options available to them.”
Some lenders will accept a FICO credit score as low as 520, and others have no minimum credit score. Lenders may or may not publish minimum credit score requirements. If you qualify with a low credit score, the lender may charge you a high interest rate to compensate for the risk of default.
However, for bad credit borrowers, loan amounts may be limited and you may face an APR approaching 36%.
“There are many lenders who will lend to a consumer with a poor credit score, but interest rates will be high,” Rafferty says. “For those without good credit, a co-borrower with very good credit can be a huge help in securing a personal loan.”
Your DTI ratio is another major factor for emergency loan approval. It tells the lender how likely you are to make payments on the loan along with other debt obligations. A DTI ratio of 43% – meaning 43% of your income goes to debt payments each month – is generally the ceiling for most loans.
Not sure you’ll get approved? Some lenders enable you to prequalify with a soft credit pull that has no effect on your credit score.
In an emergency, you may be tempted to take the first loan you can find. But spend the time to compare loan offers.
“Respectfully, most of them are pretty bad, so I’d focus on which one is going to give you the lowest interest rate, understanding that none of the interest rates are going to be good,” Ulzheimer says.
Research your options, particularly before choosing a costly payday loan or title loan, given the higher interest rates, Schlueter says. He recommends first applying with a personal loan company to find out whether you’re eligible.
Consider factors including APRs, repayment terms, penalties and fees, qualification requirements, and number of business days for approval and disbursal. Make sure you get the best deal possible on your emergency loan by looking at:
- Cost. Expect to pay interest charges and fees for an emergency loan, and the APR includes both. Interest rates typically range from 6% to 36%, according to Experian. Many personal loans have an origination fee of up to 8%, though some lenders don’t charge this fee, and others offer autopay or relationship discounts.
- Terms. Compare how much you can borrow with how long you have to pay it off. Be sure you can get enough to cover your expense, but avoid taking more: Some lenders may have a minimum loan amount that exceeds what you need. Consider whether you can comfortably afford the monthly payment or whether you should extend the term length to lower your payment, Schlueter says. The repayment term should be long enough that the monthly payment is manageable for your budget, but not so long that you’ll be stuck paying for an emergency expense for several years.
- Speed. Some lenders work faster than others. If timing is critical to the day, find out whether the lenders you’re considering can deliver funds on time. Borrowers typically wait one to seven business days to receive a personal loan, according to Rocket Loans. That breaks down to one to three business days for approval and one to five business days for disbursal, with some loans taking as long as 30 days to process, the lender reports.
- Approval. Consider your likelihood of approval based on the lender’s requirements. What is the lender’s credit score and DTI ratio criteria, and does the lender accept co-signers or co-borrowers? Find out whether you can prequalify for a personal loan without hurting your credit score.
- Reputation. Know what you’re getting into by checking reviews, ratings and formal complaints about the lenders you’re considering. The Better Business Bureau, Trustpilot and the Consumer Financial Protection Bureau’s Consumer Complaint Database are good places to start.
Make sure you explore alternatives to an emergency loan before you apply for one. An emergency loan isn’t the only solution when you’re financially stressed and you need cash quickly for an unexpected expense. Some other options:
- Use a credit card. But carrying a balance could make credit cards a more expensive choice than an emergency loan unless the charge is small enough to be paid off relatively quickly.
- Ask for a paycheck advance. Your employer might be able to pay you ahead of schedule to help you through a difficult time.
- Borrow from insurance or retirement. Most retirement plans and some life insurance policies allow you to borrow from your account, Rafferty says. But you can face tax penalties for early withdrawals from a retirement account, and you are depleting the funds you have to live on later and distribute to beneficiaries.
- Ask for help from friends or family members. Make sure everyone is clear about the terms to avoid strained relationships.
- Reduce your medical bills. If you can’t afford to pay a big bill upfront, reach out to the medical office and explain that you’re in a bind. The hospital or facility may be able to put you on a payment plan or reduce your payments.
- Ask about hardship programs. If you’re struggling to pay a loan or other bill, the lender may offer a forbearance program. The pause in payments may allow you to cover your emergency expense.