What Are Emergency Loans?

Life can change in an instant. And, depending on your financial situation, an unexpected event could cause you to need money right away.

If this happens to you, an emergency loan may be a good way for you to get cash fast – as long as you understand the risks that come with taking on more debt.

Why You Might Need An Emergency Loan

While it might be natural to just assume an “emergency loan” is only for catastrophic situations, this isn’t always the case. In reality, there are many instances when you might need quick cash to cover expenses that have popped up and need to be paid now.

Consider these scenarios when you might need an emergency loan in a hurry:

• Health-related expenses: Whether it’s a new preventative medicine or a simple medical procedure, health care bills can pile up. If you have a spouse and/or kids, you may have to cover their medical expenses as well.
• Income reduction: If you work on commission or in a part-time role, you might find yourself in a period of reduced income. If you don’t have enough in savings, an emergency loan may help cover your day-to-day living expenses.
• Vehicle maintenance: Your vehicle insurance might cover certain maintenance and even some repairs, but anything major that happens to your car, motorcycle, or any other vehicle you own could force you to spend money toward your deductible or simply pay out of pocket.
• Home repairs or upgrades: Nothing lasts forever. Your roof, hot water heater and home appliances will eventually need repairs or upgrades. These won’t come cheap, but an emergency loan can soften the blow to your finances and help you make your upgrades quickly.
• Unexpected travel costs: At some point in your life, you may have to jump on a plane to see family members or friends at the proverbial drop of a hat. It’s nearly impossible to plan for these events, and they may require cash fast to cover the costs.

Questions To Ask Before Choosing An Emergency Loan

Before looking into the various loans for emergency situations, first ask yourself these four questions:

• Will I qualify?: You may not qualify for every type of emergency loan due to some emergency loan choices carrying a strict credit score or collateral requirement. To know which emergency loans are an option for you, you must first know which ones you’re likely to be approved for.
• What is the interest rate?: Your loan interest rate will be a major factor in how much you spend over the repayment term of the loan.
• What is the repayment term length?: Will you be able to pay the loan back quickly? If not, you may need a loan option with a longer repayment term.
• Are there other costs?: In some cases, you’ll incur additional fees for taking out an emergency loan.

Types Of Emergency Loans

If you need an infusion of cash, you may be able to get it through an emergency loan. Each of the emergency loans described next has both important pros and cons to consider, however.

Personal Loan

If you have good credit and a history of repaying your debts, you may qualify for a personal loan. Personal loans are available through many banks, credit unions and online lenders.

An emergency personal loan can be a good option compared to some funding alternatives that have higher interest rates. Also, when you take out an unsecured personal loan, you don’t need to provide collateral. That means you don’t risk the loss of a personal asset if you default on the loan.

However, failure to repay a personal loan can result in significant damage to your credit.

HELOC

A home equity line of credit (HELOC) is one way to get cash quickly using the equity in your home. A HELOC is only available to homeowners who have equity in their home to leverage, and it can be a great option for securing a large amount of cash if needed.

Keep in mind that your home acts as collateral for a HELOC, so if you can’t pay off this secured loan, the lender has the right to take possession of your home.

Title Loan

Want to secure an emergency loan with an asset that’s not a house? With a title loan, your car serves as the collateral.

Title loans are available to anyone who owns their vehicle, but if you don’t pay off your loan in a specified time, the lender can take possession of your car. Title loans tend to be short-term and come with a steep interest rate.

Credit Card Cash Advance

Many credit card companies will offer you the ability to take a cash advance on your card. This gives you instant cash and puts the balance on your card’s account. However, you generally are limited in the amount of money you can access with a credit card advance, and you may have to pay extra fees to obtain the money.

Payday Loan

With a payday loan, you can receive money on the spot if you have a job and agree to pay the loan back as soon as you receive your next paycheck.

Be careful, though. Payday lenders are notorious for being shady and sometimes downright predatory. Many payday lenders charge an annual percentage rate (APR) of around 400%, making this an extremely expensive way to get emergency money. Because of the costs, it should also be a last-resort option in most cases.

Comparing Emergency Loan Types

Here’s a snapshot of the similarities and differences between the emergency loans discussed at greater length above.

How To Get An Emergency Loan

Your eligibility for emergency financing will depend in part on the type of loan you apply for. Here’s a quick overview of how you might prepare for and get an emergency loan:

1. Check your credit score. This will help you figure out the loans you might qualify for.

2. Choose a loan type and request quotes. Once you decide on a particular loan, request quotes from different lenders to get the best loan conditions for yourself.

3. Fill out an application. Complete the application process for the lender you choose. This may require uploading images of your photo ID and providing proof of your income and mailing address.

4. Wait for approval. Some lenders offer instant approval, while others might take several days to respond.

5. Receive your money. Once approved, you’ll receive your money – sometimes as fast as the day of your approval.

6. Pay back your loan. You’ll be required to pay back your full loan amount, plus interest, over an agreed-upon period of time.

How To Avoid An Emergency Loan

An emergency loan might not be your best option if you need cash. By taking on any type of emergency loan, you’ll be incurring new debt you wouldn’t otherwise have.

Consider these ways to potentially sidestep the need to apply for an emergency loan:

• Reduce spending. Take a look at your budget. Where can you reduce your spending? If you can find a few areas where it’s possible to cut back, you may be able to come up with the cash you need.
• Take on a side hustle. Adding an extra source of income from a side hustle can be a great way to bring in more money.
• Invest your savings. If you can grow your savings through investing, you can let your money work for you. This growth can help provide the financial resources you’re currently lacking.

FAQs: Emergency Loans And How They Work

What is an emergency loan?

“Emergency loan” is a general term for any loan that can provide you with fast cash. People are most likely to consider an emergency loan when they need help paying for unexpected expenses. Common examples of emergency loans are personal loans, HELOCs, credit card cash advances, title loans and payday loans.

Can I qualify for an emergency loan?

Your loan approval will depend on your qualifications as a borrower, along with the financial and collateral requirements of the particular emergency loan you apply for. Evaluating your credit score and assets could give you a better sense of the emergency loan or loans that are attainable.

What type of emergency loan should I choose?

This will depend on several factors, including your credit score, assets that you can use as collateral, and your desired loan conditions. When weighing your options, you’ll want to consider interest rates, repayment periods and any collateral requirements – as well as what you stand to lose if you find yourself unable to repay a secured loan.

Again, payday loans should generally be considered a last resort for emergency cash.

Do I need an emergency loan?

Needing cash quickly doesn’t necessarily mean you need an emergency loan. If you can cut back on your spending, save extra cash, or bring in money through a side hustle or second job, you may be able to avoid seeking an emergency loan.

The Bottom Line: An Emergency Loan Can Help If You’re In A Bind

An emergency loan can provide the cash you need in short order, whether you’re looking to pay unexpected medical bills, make urgent home repairs or put the money to another time-sensitive cause.

But, if you’re not inclined to go deeper in debt in order to acquire the funding you need, you may be better off pursuing another option – even if that means simply curtailing your spending or finding other sources of income.

Download the Rocket Money^SM App for help with tracking your spending so you can start saving for unexpected expenses.