Pros and cons of emergency loans: How to tell if one is right for you

Images by GettyImages; Illustration by Hunter Newton/Bankrate

The advantage of an emergency loan is that it gives you access to quick cash if you’re faced with an urgent, unexpected expense. Many borrowers chfoose personal loans for emergencies because of how easy they are to qualify for and how quickly you can access funding.

Although they’re a convenient funding source, there are drawbacks like fees and high rates for bad credit personal loans. Emergency personal loans can be lifesavers in a bind, but can also worsen your financial health if you rely on them without making changes to your spending and savings habits.

Pros of emergency personal loans

Choosing personal loans for emergencies comes with a number of benefits ranging from fast funding times to an entirely online experience.

Fast funding

Most personal loan lenders offer quick approvals with next-day funding possible. Some lenders, like LightStream, even offer same-day funding if you apply early enough in the day. That gets your car out of the shop faster or pays your dentist to repair that root canal.

Easy qualification

Most personal loans are unsecured debt, which means approval is based mostly on your credit score and income stability. That means less paperwork is needed, which can be a welcome benefit in an urgent situation.

Stable fixed-rate payment

Emergency loan interest rates are fixed, so you won’t have to worry about rate changes like you would with a credit card. You’ll also know your payment start and end date when you sign your final papers.

Longer repayment options

Having one to seven years to repay an unplanned bill can give you more payment choices. That can be a big relief if you’re still recovering from a medical emergency or missed work due to your car being in the shop.

Accessibility

You don’t need perfect credit to get approved for an emergency loan, and you may qualify with scores as low as 300. Although bad credit loan APRs are as high as 36 percent, they are much cheaper than the 400 percent APRs you’ll find on payday loans.

Limited credit impact

Unlike credit cards, personal loans are installment loans, and taking one out won’t affect your credit utilization ratio. Your credit utilization ratio is based on how much of your total revolving credit you have used, and doesn’t factor in installment loans.

Cons of emergency personal loans

Despite their flexibility and fast funding times, emergency loans also have disadvantages to be aware of before applying.

Fees

Lenders may charge origination fees as high as 12 percent of the loan amount. Some even assess early repayment penalties. You may also pay late fees, overdraft fees and other charges, depending on the lender.

No payment flexibility

You can’t make a lower payment than what is stated in your loan agreement. Once you pick a repayment term, you’re locked into it until it ends or until you refinance.

High interest rates

You could pay a higher interest rate than a credit card if you have a very low credit score. Read the fine print: Some alternative payday personal loan lenders may charge triple-digit APRs.

Requires stable income

Because most personal loans are unsecured, your income needs to be consistent for approval. You may not qualify if your seasonal, tip or commission income varies significantly.

Can become a stopgap for poor savings habits

Consumers often turn to emergency personal loans because they don’t have money saved in an emergency fund. In fact, Bankrate’s Emergency Savings Report found that only 44 percent of people have at least three months of expenses saved.

May lead to reliance on debt

The ease and speed of getting personal loans makes it tempting to use them whenever money is tight. Debt should always be a last resort — rather than first resort in an emergency.

Should I take out an emergency loan?

While using a personal loan for emergencies can be beneficial, it’s not right for everyone. Depending on your financial situation and loan purpose, taking one out may or may not make sense.

When an emergency loan might be necessary

There are times when getting an emergency loan makes sense. This is especially true if paying cash for the emergency would deplete your savings and leave you unable to pay basic bills like rent, groceries or utilities.

• Unexpected home repairs: A roof leak in the rainy season, air conditioning failure in summer or heater breakdown in winter often require repair bills that can quickly run into the thousands of dollars. An emergency personal loan can cover some or all of the expenses.
• Car repairs: If you live somewhere without good public transportation, a working car is an absolute must. Major car repairs get pricey quickly, and temporary transportation costs like Uber get expensive. An emergency loan may get you back on the road faster.
• Dental work: Unfortunately, even the best dental health plans don’t entirely cover every type of dental work. An emergency crown or chipped tooth repair can cost thousands, which may make an emergency loan a necessity.
• Personal tragedies: Although some airlines offer bereavement fares, the cost of flying your family across the country to attend the funeral of a loved one can add up. An emergency loan can give you more time to repay the loan while you’re grieving the loss.

When an emergency loan should be avoided

The last thing you want to do is borrow money with average interest rates in the double digits that you don’t really need. There are some scenarios where it also just doesn’t make sense.

• It’s a want, not a need: You may be stressed and feel like you need to take an emergency trip out of town to decompress, but it’s not a must. Emergency loans should be reserved for costs that prevent you from working, eating, being healthy or having a safe place to live. Everything else is likely a want.
• You’re going to switch jobs: A personal loan is approved based on how much you make now. If you plan to change careers or jobs, skip the personal loan and use a credit card. The credit card’s minimum payment option will give you a lower payment while you’re job hunting or waiting for your first paycheck.
• You have an emergency fund: The point of an emergency fund is to use it when something urgent arises. It will be much cheaper than paying 24 to 84 months worth of interest on an emergency loan. Just make sure you take steps to save up and replenish the funds as soon as possible.

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, there are some alternatives to consider.

• Use a credit card you already have: An existing credit card can be your best friend in a crunch if you have available credit. Just be sure to pay it off as quickly as possible to avoid a drop in your credit score.
• Check out cash advance apps: You may be able to get up to $750 worth of your next paycheck if you qualify for a cash advance app. Some of these apps are free of charge or allow you to pay optional tips. However, if you need funds instantly, expect to pay a small fee or a subscription cost to use the app.
• 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 help. 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.
• Request a payment plan: Contractors, doctor’s offices and car repair shops may offer payment plans to help you repay a hefty bill. Even if they don’t, it never hurts to ask if they can accept regular payments of the balance instead.
• Apply for a 0 percent APR credit card: If you have good or excellent credit, you could be eligible for a 0 percent APR credit card. These cards do not assess interest on purchases during an introductory period, typically between 12 and 20 months.
• Get a paycheck advance: Research your employer’s policies and see if there is specific guidance around taking out an advance. This can be a good option in an emergency, but like a pay advance app, you will be on short funds come your next payday.

The bottom line

Emergency loans are easy to apply for, flexible and quick. Still, they have downsides — like higher costs — that you should consider when deciding if they’re a good fit.

Be sure to shop around and prequalify with multiple lenders. Compare loan amounts, interest rates and terms to make an informed decision and choose the right lender.

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.