Emergency Loans - Are They Available?

Many Americans need some financial help now and then. One in three households has trouble paying their bills at times, according to the CFPB. You might be able to use an emergency loan to cover unforeseen costs or a loss of income. Handled correctly, an emergency loan can help you get through the immediate problem and avoid a more serious financial crisis. 

What are emergency loans?

An emergency loan is a loan you can use to see you through an unexpected financial setback. While several types of loan could be used to cover unexpected expenses, there are two key characteristics of an emergency loan:

• Money must be available quickly. A streamlined application and approval process is ideal. So is funding within a couple of business days.

• There should be no restriction that would prevent you from using the funds on your emergency expenses. 

Emergency loans are available from banks, credit unions and non-bank lenders. Having choices is important so that you can compare loan terms and find the least expensive loan for your needs.

Types of emergency loans

Emergency loans break down into two major categories – secured and unsecured.

Secured loans 

A secured loan requires you to put up some form of collateral. This is property that is valuable enough to guarantee that the lender will get its money back. 

Here are some examples of secured loans:

• Secured bank loan. A bank or a credit union might accept some personal property as collateral for a loan. Traditional lenders prefer collateral that is easy to value and sell.

• Home equity loan or HELOC. You need home equity to get these loans. And they require a home appraisal, which slows down processing. However, you can establish a HELOC (line of credit) now for future emergencies and get access to fast cash.

• Auto title loan. This involves using the title to your vehicle as collateral. Your ability to do that may be limited if you owe money on the vehicle. This type of loan can be very expensive.

• Pawn shop loan. In some areas, local pawn shops will still extend credit in exchange for you letting them hold onto something of value as collateral. This can help you get a loan without having good credit, but the terms are often very expensive. 

Because secured loans offer lenders some guarantee of payment, they may be easier to get than unsecured loans. For the same reason, some secured loans may offer better credit terms. 

One drawback is that you’ll need something of value to put up as collateral. If you can’t repay the loan, you risk losing that collateral. Also, speedy secured loans like auto title loans and pawn shop loans typically charge more expensive fees and interest. 

Unsecured loans

As the name suggests, unsecured loans do not require collateral. As a result, approval is based largely on two things:

• Your credit history. You don’t necessarily need a good credit score to get a loan, but it will help you get a loan at a lower cost.

• Your ability to repay. Lenders measure this by comparing your monthly income to the required payments on your debt.

With no collateral to appraise, some unsecured loans can be approved and funded in as little as one day.

Reasons to take an emergency loan

Financial emergencies come in many different forms. For example:

• Car trouble requiring professional service. 

• Damage to your home or a mechanical breakdown not covered by your homeowners insurance. Even if an expense is covered, typical homeowners policies have a deductible of $500 to $1,000. That’s enough to leave you with a significant out-of-pocket expense. 

• Medical expenses. These can be both unexpected and expensive. They are also very common. 

• Job loss. Even in a strong job market the typical length of unemployment after a job loss is about two months. 

• Legal expense. A lawsuit or court judgment against you can be very costly. It can be even worse if you don’t get the right legal advice.

Financial emergencies can happen to anyone. They are not unusual, and they are nothing to be ashamed of. The most important thing is planning for the unexpected with a clear head, and an emergency loan may be a good option.  

When should you consider an emergency loan?

Here are some of the signs you should consider an emergency loan to handle an unexpected financial need:

• You don’t have enough money coming in to cover the expense by the time the bill is due. If you can cover the expense with your next paycheck or two, you may not need a loan. Call the creditor to see if you can work out a payment plan. 

• You don’t have savings to dip into. Using savings to pay for an unexpected expense is generally cheaper than borrowing, unless you’d be hit with penalties. For example, you might pay a penalty for accessing a CD before its maturity date, or a retirement account before age 59 ½. If that’s the case, a loan might be cheaper.

• You don’t have a less expensive form of credit available. If you have a credit card or a home equity line of credit that’s not maxed out, see if it’s cheaper than getting a new loan. 

How to get an emergency loan

Online lending has made getting an emergency loan faster, easier and more efficient. Here are the steps to take:

• Search review websites and the sites of individual lenders for loan offers.

• Compare rates, terms and loan sizes to see which loans best fit your needs.

• Speed is often important for emergency loans. Pay attention to loan approval and funding times. Eliminate lenders that can’t deliver money when you need it.

• Look for opportunities to get pre-qualified online without a “hard” credit pull. This supplies the details of loans you can qualify for without impacting your credit score.

• When you find the offer that best fits your needs, fill out the application carefully and accurately.

Avoid emergency loan scams

Sadly, a favorite trick of criminals is to take advantage of emergencies to scam their victims. Here are four types of scam to avoid:

1. Advance fee scam. No loan should require you to pay anything in advance. Fees are generally taken out of the amount you borrow. The idea is for the lender to give you money, not the other way around.

2. Extremely expensive short-term loans. Payday loans and other short-term loans are not always scams but generally charge very high fees. Most borrowers have to renew their loan when it comes due, which means they pay even more fees and interest than expected. The interest rate on payday loans averages about 400%, compared with credit cards which average 20-30%.

3. Fake government programs. After a natural disaster or other state of emergency, people may offer to help you get government assistance in exchange for a fee. You don’t have to pay to get government aid. Also, only seek government assistance on a .gov website.

4. Identity theft. Applying for a loan requires providing sensitive personal information. Check out a lender before providing that kind of information online. Always look up lender homepages yourself rather than clicking on links you’ve been emailed or texted. Those links may lead to “phishing” sites designed to steal your private information.

Other solutions

An emergency loan may not be your only option. Here are some other common approaches to meeting unexpected expenses:

• Borrowing from friends and family. This is very common. But you have to know someone in a position to provide help.

• Borrowing against retirement assets. Some 401(k) and other retirement plans allow you to borrow against your plan balance for approved reasons. You’ll avoid tax penalties for early withdrawal, but you’ll lose investment growth opportunities. 

Credit card payment or cash advance. If you haven’t maxed out your credit card limits, this can be a faster way to borrow than taking out a loan. However, a personal loan might be cheaper if you qualify.