Setting aside an emergency fund is one of the smartest financial decisions you can ever make. The extra money can relieve stress during uncertain times and will help bail you out when you are in a tough spot. Surprisingly, nearly three in 10 U.S. adults don’t have any emergency savings. For those who do, only 20% of them have enough to last them three months or more.
These figures indicate that most of us would have to borrow if we urgently required some money to cover an unexpected expense. Before you go for an emergency loan, here are some things you should know.
What is an Emergency Loan?
An emergency loan is a personal loan that you can take out when you need cash fast to cover an unexpected expense. Since this financing option allows you to access funds on short notice, it’s an effective way to foot costs that can’t wait. While it’s impossible to know when a significant expense will emerge, educating yourself on the different emergency loan options will help you make financially sound borrowing decisions.
It’s important to note that most of these loan types should only be considered as a last resort.
Types of Emergency Loans
Title Loans
Title loans are secured loans that require a valuable asset as collateral. The asset can be any motor vehicle, truck, or RV. Normally, this loan is repaid within 15 to 30 days. The lender may give you up to 25% of your vehicle’s total value, although the typical amount is around $1,000. Repayment is either a single payment plan or a multi-installment option, depending on the terms. There are few qualifications and some lenders even offer online title loans bad credit options.
Unsecured Personal Loans
Unsecured personal loans, also known as signature loans, are approved without the use of assets or property as collateral. The borrower qualifies based on their credit history and income. These loans are more risky for lenders than secured loans are, and that’s why they scrutinize your creditworthiness. Typically, the interest rates are lower than other types of emergency loans and the repayment terms are usually better.
Payday Loan
Payday loans, also called cash advance loans, are short-term unsecured personal loans that must be repaid when your next paycheck arrives. The amount you can borrow depends on how much you earn and your credit profile. Although you can negotiate the repayment terms, lenders expect loans to be fully repaid within two or three weeks. These loans come with high-interest rates and borrowing fees.
Credit Card Cash Advances
Credit card cash advance is a short-term loan that lets you withdraw cash from your credit card account. You can get the cash from the bank or an ATM if you have the PIN. Although convenient, it comes with significant interest rates and processing fees. Again, the amount of cash you can withdraw using this option is typically lower than the credit limit you’re given for purchases.
Pawn Shop Loans
Pawn Shops sometimes offer collateral-based loans secured by valuable items such as jewelry, electronics, musical instruments, and camera equipment. When you pay back the amount you borrowed (plus interest), your item is returned. It’s often a quick way to acquire emergency money, as it doesn’t require a traditional loan’s lengthy application process. However, it’s an expensive type of loan with a high risk of losing your valuables if you fail to repay on time.
Critical Situations Where You May Need an Emergency Loan
There are situations where emergency loans can help. However, they should only be used as a last resort due to their high costs. Here are a few scenarios where using these types of loans makes sense.
- Medical emergencies
- Urgent car repair
- Unexpected education expense
- Major appliance break
- Home repairs that can’t wait
- Funeral costs
Other Smart Ways to Raise Cash
There are other ways you can raise cash when you find yourself in a stressful financial situation. Before heading to a pawn shop or talking to a payday loan lender, consider the following cash-raising strategies first.
- First, attempt to secure a short-term loan through a traditional bank or credit union.
- Consider peer-to-peer loans as the approval rates are higher, and the interest rates lower than that of banks.
- Talk to your close family members or friends.
- If the emergency can wait, look for an extra part-time job to supplement your income.
- Find a cosigner to help you get approved for a more affordable loan from a bank.
- Talk to a local charity, as you may qualify for emergency cash to cover essential expenses.
Always Assess Your Options Before Seeking an Emergency Loan
The best way to be free of debt is to avoid borrowing. Start preparing for situations that may require emergency cash by establishing a rainy day fund. If you exhaust your emergency money during a tough time and you are forced to take a loan to address a pressing situation, take some time to shop around and compare different interest rates, fees, and loan terms from various lenders.
