What is an Emergency Loan?
A short-term loan for emergency purposes is one that can be used to pay unexpected or urgent expenses. You can either make it secured by putting up collateral such as a house or car, or it can be unsecured which means you owe nothing but the money.
Secured emergency loans
A secured loan may be appealing for you if your credit is not good.
This is because secured loan lenders don’t conduct credit checks. The minimum credit score needed to be eligible for a loan is not required.
Secured loan providers also don’t report late payments on any of the major credit bureaus. If you are unable to pay your debt, your collateral could be lost.
Remember Kelsey, my friend? Kelsey believed that a secured loan was the best option to pay for her emergency expenses. There are many other options.
Unsecured emergency loans
Unsecured loans are loans that don’t require collateral. An unsecured loan lender will often use your credit score in order to determine your chances of approval. Unsecured emergency loans have higher interest rates because they are more risky for lenders than secured loans.
How to choose an Emergency Loan
You may have an emergency. But wait! There are many types of emergency loans, some more predatory than other. Here are some of the most common emergency loans that banks, credit unions and online lenders offer.
A payday loan is one of the fastest but most risky options in an emergency. Payday loans, which are usually between $100 and $1,000 in size, should be paid off by the next pay period. Although it may sound simple to repay a few hundred dollars within 2-4 weeks, payday lenders often charge high late fees which can trap borrowers in a vicious cycle of debt.
For a better understanding of the fees, the average APR on a payday loan is 400%. Interest typically accrues at $15-20 for every $100 borrowed.
These loans can be so dangerous that up to 80% of borrowers default on their payments. This is because they are too expensive and most people don’t have the means to pay the interest. Payday lenders can use the money owed to pay off new loans and then push vulnerable borrowers deeper into debt. We recommend that you consider other options before taking out a payday loan.
Cash advances/credit cards advances
An emergency loan can be obtained by taking out a cash advance. This is the fastest and easiest way to obtain one. One can obtain one by either withdrawing cash from an ATM with your credit card, or by cashing a cheque.
The amount you get will depend on your FICO score as well as your bank’s policies. Some banks limit the amount of credit that a borrower can receive. Kelsey may have a $1000 line of credit, but her bank might only authorize 50%. Some banks, on the other hand offer the same fixed amount for emergency loans to all customers.
Cash advances are subject to extremely high interest rates. Annual percentage rates can range from 16.99% to 28.99%. You may be subject to a transaction fee or a processing fee if you choose this route.
Unsecured personal loans are available for use for just about anything, including medical expenses and emergency expenses. A traditional lender such as a bank can give you a personal mortgage. In these cases, your credit score, credit history, and debt-to income ratio will determine your eligibility. You can also use Pigeon to make a loan between yourself and a friend, or family member, and have it managed for free.
Tip Avoid the negatives of a hard draw by asking your lender if they can pre-qualify with a soft credit check.
Personal loans are a good option if you prefer installment loans. These loans allow you to pay your loan over months or years. Funds are usually deposited to your bank account within a few business days after approval.
A title loan is a short term secured loan that relies on the borrower’s vehicle for collateral. Because lenders don’t run credit checks, it’s one the easiest loans to get. Loan applications can be approved in a matter of hours and funds available within 24 hours. This sounds like one the best options for emergency loans.
Title loans are similar to payday loans in that they have short repayment terms and high interest rates. Let’s suppose Kelsey owned her car and put it up for collateral to get the money she needed. She takes out $2,000 at a 25 percent interest rate and must pay it back within 30 days. She will have to repay $2,500 after 30 days.