Pros & Cons of Emergency Loans | Bankrate

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An emergency loan can provide much-needed relief if you’re in a financial bind and low on cash. It’s a type of personal loan — typically unsecured — that helps you quickly access cash to cover unexpected expenses. The loan proceeds are dispersed in a lump sum and payable in monthly installments over a set period.

Emergency loans are accessible through traditional banks, credit unions and online lenders. Although they’re a convenient funding source, there are drawbacks to consider before applying. An alternative may be a better option, depending on your financial situation.

Pros of emergency loans

These benefits make emergency loans attractive to individuals facing financial hardship:

• Flexibility: Most lenders don’t impose spending restrictions, so you can use the funds however you see fit. Emergency loans are often used to cover vehicle repairs, medical or dental bills, funeral costs or other financial emergencies.
• Online prequalification: You can get prequalified online with some lenders and view loan offers, including projected terms and monthly payments, without impacting your credit rating. Online prequalification makes it easier to compare rate quotes from various lenders and choose the best option.
• Fast funding: Some lenders offer streamlined online application processes and quick approvals. Short funding times — often as soon as the next business day — is another perk that comes with emergency loans.
• Accessibility: You don’t need perfect credit to get approved for an emergency loan. A credit score of 580 is enough to get funded with some lenders.

Cons of emergency loans

Despite their flexibility and fast funding times, emergency loans also come with their share of disadvantages:

• Fees: Some lenders charge origination fees. You could also be on the hook for early repayment penalties if you decide to pay the loan off early before the term ends.
• Small loan amounts: Emergency loans generally come in smaller amounts than traditional unsecured personal loans. Unfortunately, the loan amount you’re offered may be too small for the expense you need to cover.
• Credit consequences: It’s also common for emergency loans to come with shorter repayment periods, which means higher monthly payments. You could damage your credit rating if the loan is unaffordable and you fall behind on the monthly payments.
• Interest rates: The interest rates are often higher than you’d get with a traditional loan product, especially if you have a lower credit score. It’s not impossible to get a competitive rate on an emergency loan, but you’ll typically need good or excellent credit to qualify.

How to tell if an emergency loan is right for you

An emergency loan could be ideal if you have good credit and prequalify for a loan with competitive terms. Your monthly payment should also work for your budget for an emergency loan to make sense.

But if money’s tight and you’ll likely have trouble repaying what you borrow, taking out an emergency loan isn’t a smart financial move. You should also avoid emergency loans if there’s a more cost-efficient way to cover the expense, like government assistance or a charitable gift.

If the cost you need to cover isn’t urgent, consider saving up over time to pay out-of-pocket. You’ll avoid taking on more debt and paying interest on a loan.

Alternatives to an emergency personal loan

Whether you’ve been turned down for an emergency personal loan due to credit issues or would prefer to explore other options before applying, here are some alternatives to consider:

Borrow from friends or relatives

Reach out to friends or family members and ask to borrow the cash you need. They may be willing to provide you with a small short-term, low-interest or interest-free loan. Be sure to only borrow what you can comfortably afford to pay back. Also, get the agreement in writing to avoid any confusion.

Reach out to a local charity or nonprofit

Call 211 to inquire about financial resources available in your local area. Depending on where you live, you may be eligible for an interest-free loan or grant. The operator could also refer you to other agencies or organizations who can assist you.

Request a payment plan

If you need the funds to repay a lender, creditor or service provider, ask about a payment plan. They may allow you to enter into a payment arrangement that lets you split up the amount you owe and avoid penalties. Some will also defer monthly payments for a bit until you can get back on track.

Apply for a 0 percent APR credit card

You could be eligible for a 0 percent APR credit card if you have good or excellent credit. These cards do not assess interest on purchases during an introductory period, typically between 12 and 20 months. Be sure to pay the balance in full before the promotional APR period ends, or you’ll be charged interest.

Get a paycheck advance

Ask your employer for a paycheck advance to get the cash you need. This approach typically only works if you’ve been employed for some time. Still, it’s worth asking your employer, even if you’re relatively new to the job.

The bottom line

Emergency loans can be a viable solution for cash-strapped consumers. They’re easy to apply for, flexible and offer fast funding times. Still, these loan products have downsides, like higher borrowing costs, that should not be overlooked when deciding if they’re a good fit.

Be sure to shop around and get at least three loan quotes. Compare the loan amounts, terms, interest rates, fees and funding times for each loan offer you receive. It’s equally important to evaluate the reputation of each lender to make an informed decision. Most importantly, run the numbers to determine if an emergency loan works for your finances or if an alternative, like a paycheck advance, payment plan or a loan from a friend or relative, is a better choice.