Unexpected expenses can throw your finances off balance, leaving you in a tight spot. For example, more than 47% of Americans would reportedly struggle with a $400 surprise expense. In such cases, quick loans for bad credit can help you cover emergency expenses. So whether you need to pay for urgent medical care or critical home repairs, an emergency loan can help you bridge the gap between your expenses and income.
This article will explore emergency loans, how they work, and how to choose a safe and affordable option.
Emergency loans can be intimidating but also bring a host of benefits that include:
- Providing quick access to funds in times of need
- Able to be used for a variety of emergency expenses, including medical bills, home repairs, car repairs, and unexpected travel expenses
- Some emergency loans are safer and more affordable alternatives to high-interest loans, such as payday and car title loans
- It may help eliminate some financial strain and prevent missed payments on other bills
- Act as protection to your credit score by allowing you to make timely payments
Read ahead to learn more about these versatile funding solutions.
What’s the Story with Emergency Loans?
Emergency loans for emergencies are intended to pay for unforeseen costs. These loans are frequently unsecured, so the financer doesn’t demand collateral. Instead, the lender uses your credit score, income, and other debts to determine whether to offer you a loan and at what interest rate.
One of the leading credit reporting agencies noted an average interest rate for a 24-month personal loan of 9.63% in 2020. For this kind of loan, lenders typically have a minimal credit score and maximum debt-to-income ratio requirements. In addition, some lenders offer secured, co-signed, or joint loans that may be simpler to qualify for.
How Do Emergency Loans Work
A personal emergency loan is an installment loan, which means you get the cash in one lump amount and pay it back over time in equal monthly payments. Typically, repayment periods range from two to seven years. Due to the fixed interest rates on these loans, your monthly payment will remain constant throughout the loan term.
Most reputable lenders report loan payments to the three major credit bureaus, so your payments factor into your credit score. On-time payments help your score, while missed payments can hurt it.
Other Types of Emergency Loans
While emergency loans are a safer option than high-interest loans like payday and car title loans, other options should be considered as a last resort. Here are some types of emergency loans to be aware of:
No-credit-check installment loans: Some no-credit-check installment loans charge rates above 100%, and repayment terms on these loans may be longer than you need, resulting in exorbitant interest costs over the loan’s lifetime.
Pawn loans: Pawn loans require you to hand over a valuable item to a pawnshop, and APRs can reach above 100% on this type of loan.
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 can’t repay the loan, the lender will take your car.
Payday loans: Payday loans charge fees that can equate to APRs of 400%, and borrowers who aren’t prepared to repay the loan on their next payday often borrow again, causing them to slip into a cycle of debt.
How to Choose an Emergency Loan
When choosing an emergency loan, there are several factors to consider.
Monthly payment: Weigh how the loan’s monthly payments will impact your budget to determine if you can comfortably pay it on time. Use a personal loan calculator to see how the rate and repayment terms affect the monthly payment.
Interest costs: The loan with the lowest APR is the least expensive overall. Look for a loan that balances affordable monthly payments with reasonable interest costs.
Fees: Check for fees, including origination fees, which can be 1% to 10% of the loan amount and may be subtracted from the loan before you get the funds.
Funding speed: If you urgently need funds, consider a lender that offers fast funding. Online lenders often disclose the timeline in their websites’ FAQ or blog sections.
How to Get an Emergency Loan
If you need an emergency loan, follow these steps:
First, check your credit: Most lenders prioritize applicants’ credit scores in a lending decision. Next, check your credit report for any past-due accounts or errors and correct them before applying. You can view your report from all three credit bureaus at AnnualCreditReport.com.
Determine what you can afford: Review your monthly budget to determine how much you can pay toward the loan each month. That way, when comparing loan offers, you can choose a payment that best fits your budget.
Pre-qualify and compare offers: Even if you’re in a hurry, finding a reasonable rate on a loan you’ll be repaying for a year, or more is worth the extra time. Most lenders let you pre-qualify online to preview the loan’s rate, amount, and repayment term. Pre-qualifying takes a few minutes; no matter how often you do it, your credit score is never affected.
Gather 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 usually includes W-2s, pay stubs, a government-issued ID, and proof of address. You could get an instant approval decision, but taking a day or two is more common.
How to Get an Emergency Loan with Bad Credit
If you have bad credit, you can still get an emergency loan. Here are a few tips:
Add a co-signer or co-borrower: A co-signer or co-borrower can help your chances of qualifying or getting a reasonable rate. While a co-signer does not have equal access to the money, a co-borrower does. The co-signer or co-borrower is liable for the loan payments if you cannot make them.
Add collateral: When evaluating an application, some lenders offering secured personal loans consider the security offered (typically a bank account or a car). Adding collateral can increase your approval odds, but the lender may take the collateral if you make too many late payments.
Add up your revenue sources: Your monthly income is another critical element of your application. Most lenders prefer to know that you will have enough money to cover your regular expenditures, the new loan payment, and some extra. In addition, numerous lenders count on your income to include items like Social Security, alimony, or child support.
Places to look for an Emergency Loan
When looking for an emergency loan, consider the following options:
The online marketplace for emergency loans is only growing. According to a recent report, 55% of personal loans came from online lenders.
Online lenders usually allow you to check your rate before applying and offer a fast application process. Find a reputable lender that caps rates at 36% and reviews your credit and income to ensure you can repay the loan.
Banks: Some banks offer small loans that can cover emergencies. In many cases, borrowers must be existing customers to get this type of loan, but the fees are much lower than what payday lenders charge.
Credit unions: Federal credit unions cap personal loan APRs at 18%, lower than many online lenders. Some credit unions offer alternative payday loans, small-dollar loans with low rates repaid over six months to a year.
Tips for Building an Emergency Fund in Advance of Needing Emergency Loans
Building an emergency fund can help you avoid borrowing in the future. Here are a few tips:
Decide how much you need: Most financial experts recommend saving three to six months of living expenses. Then, use an emergency fund calculator to determine how much you’d need to live comfortably without working for a few months.
Start small: Three to six months’ worth of expenses can seem ambitious if starting from zero. It may be easier to begin with, a goal of $500, which can cover smaller emergencies, and work your way up. A smaller monthly savings goal can help you get there.
Automate your savings: Once you know how much to save from each paycheck, cut out the potential human error. Many banks allow you to set up recurring transfers from your checking to a savings account. If your employer offers direct deposit, have them deposit part of your paycheck into a second account.
In conclusion, unexpected expenses can put a dent in your finances and cause financial stress. However, emergency loans for bad credit can provide quick access to funds to help you cover critical expenses. With so many emergency loan options available, choosing a safe and affordable loan that fits your budget and needs is essential.
Before applying for an emergency loan, consider building an emergency fund to avoid borrowing in the future. Small Business Bank offers various finance solutions to meet your business’s financial needs. Connect with the professionals on our team today to learn more about our financing options and how we can help you manage your finances even during emergencies.