Emergency loans: what they are and how to compare them

What is an emergency loan?

An emergency loan is a personal loan that you borrow to cover an emergency expense. Emergency loans are often not guaranteedwhich means the lender uses your personal information, including your credit, income, and other debts, to determine whether to offer you a loan and at what interest rate.

Emergency loans have annual percentage rates from 6% to 36% and amounts from $1,000 to $100,000. Lenders usually have a minimum credit score and a maximum debt to income ratio requirements for this type of loan. Some offer secured, co-signed or joint loans, which may be easier to qualify for.

Even in an emergency, taking the time to compare personal loans and potentially cheaper options can save you money and help you avoid harmful lenders that hurt your credit and finances.

How do emergency loans work?

An emergency personal loan is a type of installment loan, which means you receive the money in a lump sum and pay it back in monthly installments. Repayment terms are two to seven years. These loans have fixed interest rates, so you will have the same monthly payment for the duration of the loan.

Most reputable lenders report loan repayments to three major credit bureaus, so that your payments are taken into account in your credit score. On-time payments improve your score, while missed payments can hurt it.

Other types of emergency loans

High-interest loans, such as pawnbrokers, car titles, and payday loans, should be considered a last resort after exhausting all other options. These emergency loans may be quick and easy to obtain, but they could cause long-term financial damage.

Installment loans without credit check: Some installment loans no credit check share similarities with payday loans and auto title loans. They are available online and in storefronts. These lenders do not look at your credit score or history to determine if you are able to repay the loan and what a fair rate would be, which is why many no credit check loans charge rates over 100%.

The repayment terms of these loans can be longer than necessary, resulting in exorbitant interest charges over the life of the loan.

Pawnbrokers: Pawnbrokers force you to hand over a valuable item to a pawnbroker. The store assesses the value and gives you a loan for that amount. You must repay the loan, with interest, or the pawnbroker will keep your item. APRs can reach more than 100% on this type of loan.

If you repay the loan but it takes up too much space in your bank account, you might end up borrowing from the pawnshop again.

Car title loans: With car title loans, a lender assesses the value of your vehicle and lends you a percentage of that amount. If you agree, the lender holds title to the car and you receive your loan. The lender generally does not review your ability to repay the loan and may charge 300% APR.

If you can’t repay the loan, the lender will take your car.

Payday Loans: Payday loans are high-cost, short-term loans that, even in an emergency, are risky. Payday lenders charge fees that can amount to 400% APRs, don’t check your credit score, and may not confirm your ability to repay the loan.

Borrowers who are not ready to repay the loan on their next payday often borrow again, dragging them into a cycle of debt.

Best Uses of Emergency Loans

Although lenders may ask you why you are borrowing, there are few restrictions on how you can spend unsecured loan funds. Here are examples of emergencies that you can pay with a personal loan:

  • Invoices after loss of income.

  • Unforeseen travel expenses.

How to choose an emergency loan

Calculate the monthly payment. Evaluate the impact of the monthly loan payments on your budget to determine if you can comfortably pay it back on time. Use a personal loan calculator to see how the rate and repayment term affect the monthly payment.

Compare interest charges. The loan with the lowest APR is the cheapest overall. You can use APR to compare emergency loans with other financing options. A loan with a long repayment term may seem attractive because it has a low monthly payment, but it also costs more in total interest. Look for a loan that balances affordable monthly payments with reasonable interest charges.

Check the fees. The most common fees to look for on a personal loan are origination fees. This can be anywhere from 1% to 10% of the loan amount, and it can be subtracted from the loan before you get the funds.

Ask about funding speed. If you need funds urgently, consider a lender that offers fast financing. Some lenders can fund a loan the next day, while others can take up to a week after approval. Online lenders often disclose the timeline in an FAQ or blog section of their websites.

Compare emergency loans

How to get an emergency loan

  1. Check your credit. Most lenders prioritize applicants’ credit scores in a loan decision, so check your credit report for any delinquent accounts or errors, and correct them before submitting an application. You can view your report from the three credit bureaus at AnnualCreditReport.com.

  2. Determine what you can afford. Review your monthly budget to determine how much you can afford to pay for the loan each month. So when you compare loan offers, you can choose the installment that best suits your budget.

  3. Pre-qualify and compare offers. Even if you’re in a rush, it’s worth taking the time to find a good rate for a loan that you’ll be paying off for a year or more. Most lenders allow you pre-qualify online to preview the loan rate, amount and repayment term. Pre-qualifying takes minutes, and no matter how many times you do it, your credit score is never affected.

  4. Gather the documents and apply. Once you have a loan offer with affordable monthly payments, find the documents you need to apply for a personal loan. This typically includes W-2s, pay stubs, government-issued ID, and proof of address. You might get an instant approval decision, but it’s more common for it to take a day or two.

How to get an emergency loan with bad credit

A bad credit score (below 630) doesn’t automatically prevent you from getting a loan, but many lenders weigh heavily on your credit score when applying.

Add a co-signer or co-borrower: A co-signer or a co-borrower can increase your chances of qualifying or getting a good rate. A co-borrower has equal access to funds, unlike a co-signer. If you cannot make the repayments, the co-signer or co-borrower is responsible for the payments.

Add a guarantee: Some lenders offer secured personal loans and consider the item used as collateral (usually a bank account or vehicle) when evaluating a claim. Adding collateral can improve your chances of qualifying, but the lender can take collateral if you miss too many payments.

Add the revenue streams: Your monthly income is another important factor on your application. Most lenders want to make sure you have enough money to pay your regular expenses, make the new loan payment, and have some left over. Many lenders consider things like Social Security, alimony, or alimony as part of your income.

Where to get an emergency loan

Online lenders: Online lenders usually let you check your rate before applying and offer a quick application process. But predatory lenders will try to exploit your emergency. Find a reputable lender who caps rates at 36% — the highest affordable loans according to most consumer advocates — and review your credit and income to make sure you can repay the loan.

Banks: Many banks prefer borrowers with good or excellent credit (690 or above), but there are a few exceptions. Some big banks, like American bank and Bank of America, offer small loans that can cover emergencies. You must be an existing customer to get this type of loan, but the fees are much lower than payday lenders.

Credit unions: Credit union members may have the most affordable emergency loan option. Federal credit unions cap personal loan APRs at 18%, lower than many online lenders. A credit union may consider an applicant’s membership history, in addition to credit and income, when making a loan decision. Some credit unions offer alternative payday loanssmall, low-interest loans that are repaid over a period of six months to one year.

Emergency Loan Alternatives

Cheaper alternatives borrowing is not always quick or convenient, and sometimes requires asking for help. But NerdWallet strongly recommends exhausting the alternatives first, even in an emergency. Here are some possible alternatives to an emergency loan.

Tips for building an emergency fund

While it won’t get you through today’s emergency, creating an emergency fund can help you avoid borrowing in the future. Here are some tips for set up an emergency fund.

Decide how much you need. Most financial experts recommend saving three to six months of living expenses. Use a emergency fund calculator to determine how much you would need to live comfortably without working for a few months.

Start small. Three to six months of spending can seem ambitious if you’re starting from scratch. It may be easier to start with a goal of $500, which can cover small emergencies, and work your way up. A smaller monthly savings goal can help you achieve this.

Automate your savings. Once you know how much to save on each paycheck, eliminate potential human error. Many banks allow you to set up recurring transfers from your check to a savings account. If your employer offers direct deposit, ask them to deposit part of your salary into a second account.

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