4 types of emergency loans

If you don’t have enough cash on hand or in your rainy day fund to cover an emergency expense, using an emergency loan can be a good option. Most types of emergency loans can provide you with quick access to cash. Plus, 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 offer lower interest rates for qualified applicants, others offer interest rates as high as 400%. Before you decide, find out how these four common 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 funds as a lump sum that you pay back in monthly installments. In addition to paying off the principal you borrowed, you pay interest and fees.

One of the advantages of a personal loan is that it allows you to repay a large amount over a longer period. Repayment terms vary by lender, but can generally be as short as one year or as long as seven years for qualified borrowers.

Another key benefit is that you can receive financing quickly – some lenders can issue your loan funds as early as one business day.

However, a major downside is that if you have a less than stellar credit score, you may have to pay a high annual percentage rate (interest plus fees). Some lenders have maximum APRs above 30 percent.

Who is it best for: Borrowers who are looking for lower interest rates than credit cards and high borrowing limits that don’t require collateral.

Advantages The inconvenients
  • Usually does not require a warranty
  • Some lenders have flexible repayment terms
  • You may have difficulty qualifying for a personal loan if you have bad credit

2. Cash advances by credit card

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

Credit card cash advances have higher interest rates than your card’s variable APR. Since the cash advance is tied to your existing card’s credit limit, it does not require an additional credit check.

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

Advantages The inconvenients

3. Payday loans

Payday loans are a type of instant loan that allows you to borrow a small amount (usually a few hundred dollars). The repayment tenure for these types of emergency loans is extremely short, often within two weeks or before your next pay period.

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

Who is it best for: Borrowers who need small amounts of money and can repay the loan in full within a short period of time. Whenever possible, payday loans should be avoided; consider emergency loan alternatives instead.

Advantages The inconvenients
  • Easy to qualify since most lenders do not require a credit check

4. Securities lending

Another type of emergency loan is the title loan. These are secured loans that use the title of your vehicle as collateral (hence the name). If you are unable to repay the loan before the end of the loan term (usually 30 days), the lender can repossess your car to settle the outstanding debt.

In addition to using your car to secure the short term loan, title loans have high interest rates similar to payday loan rates. According to the Federal Trade Commission, title loans charge rates as high as 300%.

Who is it best for: Consumers who want to borrow small amounts and can pay off their loans in 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 The inconvenients
  • Some lenders don’t require a credit check
  • A lender can repossess your vehicle if you don’t pay off the loan

What emergency loan should you get?

Of the four types of emergency loans described above, personal loans offer the lowest cost of borrowing.

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

If an unsecured personal loan is not a viable option, consider turning to emergency loan alternatives.

Alternatives to emergency loans

1. Home Equity Loan or Home Equity Line of Credit (HELOC)

If you’ve built up enough equity in your home, you may be eligible for a Home Equity Loan or Home Equity Line of Credit (HELOC). Depending on the appraised value of your home and how much you have left on your first mortgage, you may be able to borrow thousands of dollars.

A home equity loan is an installment loan that offers lump sum financing, a fixed interest rate, and repayment terms of up to 30 years. A HELOC is a revolving line of credit on which you can withdraw funds for a fixed term, say 10 years, with a repayment period of up to 20 years thereafter.

Both types of loans use your home as collateral, which puts it at risk of foreclosure if you cannot repay the loan.

Who is it best for: Homeowners who need large loans for necessary expenses such as home renovations or repairs or school fees.

Advantages The inconvenients
  • Average rates for home equity loans are generally lower than average rates for personal loans and credit cards
  • Requires some equity in your home
  • The lender can repossess your home if you don’t pay off the loan

2. Payment plans

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

Who is it best for: People who can pay large expenses with lower monthly payments over longer repayment terms. This alternative is ideal because it prevents you from getting into more debt.

Advantages The inconvenients
  • Some payment plans have interest-free periods
  • You may be charged interest or fees

3. Payday advance

Some employers offer payday advances, also known as payday advances, through the company’s human resources department. A payday advance provides you with initial funds from your future income. Depending on your employer’s payday advance agreement and the laws of your state, the loan may be automatically deducted from your paychecks in installments.

If your employer offers this benefit, they may have limits on how much and how often payday advances are allowed.

Who is it best for: People who need small, short-term loans who work for employers who offer this loan option.

Advantages The inconvenients
  • Some employers offer interest-free payday 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 is an option that can be useful for settling unforeseen bills. If you have a family member or friend willing to give you an emergency loan, sit down with them to be on the same page about repayment expectations.

Discuss if they want to be paid in a lump sum or if installment payments are acceptable. If the latter, how long are they willing to give you to repay the full loan and how much are they waiting for each payment? It is also wise to ask them if they expect interest in addition to the principal.

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

Advantages The inconvenients
  • A family member may charge you little or no interest
  • Defaulting on loan can ruin your relationship with the lender

Next steps

Taking on more debt to pay for a sudden expense can be a tricky situation to deal with if you are unable to repay the emergency loan. Before determining what types of emergency loans are right for you, consider whether there is a way to save for the expense as a first option.

If it’s not possible to save, look for an emergency loan with the lowest interest rate and borrow only what you need.

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Sylvester L. Goldfarb

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