According to a recent Bankrate survey, the majority of Americans (58 percent) are unhappy with the amount of emergency savings they have. According to the same survey, 34% of Americans have less saved than a year ago, and nearly a quarter have no savings.
An emergency loan is one option for those who do not have enough rainy-day savings. This funding option covers your expenses in the event of a large, unexpected expense — even if you have less-than-perfect credit. There are several types of emergency loans, but they almost always have short terms (weeks or months) and high interest rates and fees.
While you should try to plan your finances so that you have an emergency fund for unanticipated expenses, this is often easier said than done. When an emergency arises when you least expect it, an emergency loan may be the only viable option to avoid a larger problem.
Different kinds of emergency loans
An emergency loan has no specific definition; it’s a catch-all term for short-term loans intended to be used only in emergencies. Here are some examples of loans that could be classified as emergency loans.
Loans for individuals
A personal loan is an unsecured loan that gives you access to a set amount of money without requiring any collateral. The loan is then repaid in fixed monthly installments over the loan term.
Personal loans should be one of your first choices when borrowing money for an emergency. For starters, they can be used to pay for almost anything, making them suitable for any situation.
In addition, personal loans have much lower interest rates than other types of emergency loans. They have an average interest rate of 11.08 percent, according to a Bankrate study, but depending on your credit score, you could get rates as low as 5.60 percent.
Personal loans also come with a variety of repayment options. Depending on the lender, they can be paid off in as little as 24 months or as long as 10 years.
Cash advances on credit cards
In most cases, you use a credit card to pay a merchant directly. While this is useful for making purchases at merchants that accept credit cards, it is ineffective if you require cash. In that case, you can use your credit card to get a cash advance.
However, keep in mind that many credit cards charge fees for cash advances. These fees are typically 5% of the loan amount or $10, whichever is greater. Interest begins to accumulate as soon as you receive your funds, even before your next statement. Cash advances have a separate APR from regular credit card purchases. These APRs are typically higher, with the average credit card cash advance APR being 24.80 percent.
On the plus side, payoff dates are flexible, so you don’t have to pay it off right away. The longer you take to pay it off, however, the more money you’ll pay in interest.
A payday loan is a short-term emergency loan that usually lasts only a week or two. Payday lenders frequently advertise that their loans are available even if you have bad credit. Payday lenders will lend you money right away on the condition that you repay them with your next paycheck. These loans typically have exorbitant interest rates.
Payday loan fees range from $10 to $30 per $100 borrowed, according to the Consumer Financial Protection Bureau (CFPB). That means that a typical two-week payday loan can have an APR of nearly 400%. As a result, these loans should be avoided at all costs.
Title loan for a car
A car title loan is similar to a payday loan, except that it is secured by the title to your car or another vehicle rather than being unsecured. Because the loan is secured, using your vehicle as collateral can help you save money on fees and interest.
Some emergency loans are better for your financial situation than others. Even if you need money quickly, take some time to consider your options so you can get the funds you require without jeopardizing your financial health in the long run.