We all get to a point where we do not have enough money in our savings to cover a specific expense; emergency loans come in handy. With this option, you don’t have to feel helpless but you’re able to fix the problem at hand.
With the current economic times, many people are finding themselves needing emergency loans more than they did in the past. Because of the increased demand, there is a subsequent increase in the number of lenders in the US, but this does not mean that every lender is legit and should be trusted. Some may not be listed, and others may have unfavorable rules and regulations.
So, before you take out an emergency loan, below is everything you need to know about them. Read through this guide to understand how you can get one, the terms they come attached with, and how much one will cost you.
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What is an emergency loan?
Unlike a mortgage or a student loan, an emergency loan can be used for a lot of things. Moreover, emergency loans come in many different forms including;
- Unsecured personal loans
- Cash advance loans
- Credit card loans
- Pawnshop lawns
- Payday loans
For the sake of this review, we shall focus our sight on payday loans. Once an emergency loan is disbursed, it is deposited into your bank account within one or two business days. How long you have to pay back the funds depends on the lender you choose. But regardless of the lender, it’s important to understand the options you have. As such, we recommend doing your research beforehand or reading the fine print before committing to any lender.
Types of Emergency Loans
If you want an emergency loan, there are a couple of options to explore, as detailed above. However, the type of loan you’ll qualify for will depend on your creditworthiness. The types of emergency loans include:
If you have a good credit score, you can qualify for an unsecured personal loan. These loans are often flexible in their payment plans and are, therefore, ideal for emergencies. But wait, what makes these loans flexible? Simple, they are given out in a lump sum and paid back in installments under a fixed interest rate.
If your emergency requires a couple of hundred dollars, you don’t have to borrow thousands. Personal loans allow you to borrow small amounts, just what you need to solve your financial crisis and with most personal loans, you can get between $300 and $1,500. Whatever amount you decide to take, always consider the loan repayment period since this will be factored in to determine how much you repay every month.
Credit Card Cash Advance
This is basically using the balance on your credit card to get a short term loan. Your credit card company will charge an interest rate higher than that of normal purchases inclusive of a processing fee. Bear in mind that interest rate will start accruing the moment you take the cash advance.
A payday loan is a short term loan that you repay on your following payday. Unlike personal loans that are paid back in installments, payday loans are repaid in a lump sum. You should note that payday loans come with high APRs. The loan cost can be as high as 400%, depending on the state.
Though they come in handy during emergencies, the high APRs can lead you to a debt trap. If you don’t consider your ability to repay the loan, you might be stuck with an even larger debt in the long run. According to the Consumer Financial Protection Bureau, out of five payday loans taken in a month, four are reborrowed, usually, when the loan repayment is due, because of this, financial experts advise that you have payday loans as the last option.
Pawn Shop Loans
When you visit a pawn shop, you’ll have to provide an item of value as security for the loan. You’ve probably seen in movies characters pawning heirlooms and valuable jewelry to get out of tricky situations. The pawn shop will retain the item as collateral and will return it when you repay the loan.
In case you cannot repay the loan, the pawnshop will sell the valuable item and since pawn shops don’t have application processes and don’t conduct credit checks, they are great for those who cannot explore traditional credit options for various reasons.
This is another type of emergency loan. If you own a car, you can use its title as leverage to access a short loan. The benefit of using a car title as your collateral is that you can get a higher loan amount, depending on the value of your car and like pawn shops, most lenders don’t conduct a credit check for title loans. But even though it sounds really good, do your math to ensure you can afford the loan. The last thing you want is to lose your car in the process.
Alternatives to emergency loans
So far, we have established that emergency loans are great because they are processed fast, but the loans could work against you if you don’t do your due diligence. Because of the latter, you might want to consider alternatives including;
Low-interest credit cards
If you have a good credit score, and you qualify to get a low-interest credit card loan with 0% APR intro on purchases for specified periods, you could use your new card as a short term loan and repay it before the promotional period elapses.
Medical bill repayment plan
If an unexpected medical bill falls on your lap, you can talk with your hospital about having a repayment option in most cases; the health care provider will offer a payment plan. Some hospitals tend to offer financial assistance to low income or under-insured families. Every hospital has financial assistance plans but with different names and different rules and regulations.
Student loan repayment
If you have a student loan from the federal government, you can free up some cash by getting an income-based repayment option. This option will make your repayments affordable as it places a cap on the monthly payment at a specific percentage depending on your income. You might be shocked to find that you qualify to pay $0 a month.
There is also forbearance to help you free some money by temporarily stopping payments, but even when deferred, remember that your loan will continue to bear interest. While you might be safe from making a payment this month, when you bounce back, the amount you’ll repay will be higher.
HELOC (Home Equity Line of Credit)
If you own a home, this is an option to explore. You will put up your home as collateral as you apply for the loan, and before signing off on anything, you will need to understand everything about repayment of the loan.
How much does an Emergency Loan cost?
When shopping for an emergency loan, you might have come across the term ‘APR’ (annual percentage rate). Simply put, the APR points to how much the loan will cost. Before we get to the actual figures, we must understand this concept and know why it’s important.
Some borrowers think the annual percentage, and the interest rate are the same. Though for credit cards it is true, it is not the case with payday emergency loans. The two concepts are different, but even then, you have to consider both when taking an emergency loan.
Now the interest rate refers to a percentage of the principal amount. It’s what the lender charges you when you take an emergency loan. However, it’s not a true representation of what the loan will cost you. The loan cost includes extra fees like loan processing fees. The APR gives a better idea of this since it includes all fees.
The formula for calculating the APR
Calculating the APR is not difficult; below is a formula you can use. If the lender doesn’t include any fees (which rarely happens), replace the fees with a zero in the formula.
Assume you’ve taken a loan of $1,000 for a loan term of 180 days. In the end, you’ll pay back the loan with an extra $75 as the interest. You will also pay an origination fee of $25 when taking the loan. When you plug these figures into the formula, you will get the APR.
- Add the interest payable and the origination fee. $25 + $75 = $100
- Divide the result by the loan amount. $100/1000 = 0.1
- Divide the result by the loan term. 0.1/180 = 0.00055556
- Multiply the result by 365. 0.00055556 * 365 = 0.020277778
- Multiply the result by 100%. 0.020277778 – 100 = 20.28%
Why is the APR important?
The APR is important because it makes you aware of how much you’ll pay for the loan you get. Generally, you’ll use the APR to compare the loan cost and choose one that you can afford.
There are several types of APRs. These include variable and fixed APR. Fixed APR doesn’t change depending on the index during the loan term. As such, fixed APRs are more predictable for those who are keen on budgeting.
On the other hand, variable APRs change depending on the index interest rate. When the rates increases, so do the variable APR. As such, the APRs fluctuate against or in your favor. So while the APR could start low, by the end of the loan term, it might be the highest.
What affects the interest rate of an emergency loan?
Technically, lenders determine the interest rate they will offer when you apply for a same day payday loan. This rate will, in turn, affect the APR and though it’s the main determinant, other factors affect loan costs.
Some emergency loan lenders also consider your credit score when setting the interest rate. The lower your credit score, the riskier you are, and the higher the interest rate will be. Someone with a great credit score has a better chance of bargaining for a lower rate, especially if they apply in a store location than one with a low credit score.
When you shop around, you are bound to come across a lender with a great deal. Luckily, state and federal governments have rules that put a cap on the maximum APR, although this is not true for tribal loans.
For instance, you might come across a lender offering a 200% APR and another offering a 250% APR despite the loan information being the same. Never compare a credit card APR or a mortgage APR to a payday loan lender APR.
How to choose an emergency loan
Though you are pressed for time and need money fast, you should never pick the first payday lender you come across. Below are some factors to consider when making your choice.
- Funding speed – if the situation is urgent, you want to get the loan fast. Some lenders offer same day loans while with other lenders, you might have to wait for a couple of days before they finalize loan disbursement. Emergency loan lenders always disclose how long the process will take so that you know what you are getting yourself into beforehand.
- Loan costs – though speed might appear as being more important, the costs are important as well. Compare the APR from multiple lenders. With some lenders, you will have to pass a pre-qualification stage, which includes a soft credit check, among other things. During this stage, you can preview the rate and the term without it affecting your overall credit score. The lender with the lowest APR is usually the cheapest and as such the best choice. Provided the monthly payments are affordable; you should proceed to take the loan.
- Lender features – in addition to loan costs, consider other features, including payment options, and if the loan amount available increases when you get subsequent loans. Some lenders also offer discounts for subsequent loans and have rewards for those who refer their friends to the platform. Even better, some lenders forgive late fees and allow you to skip payments provided you get in touch with them beforehand.
- Customer support – even though the process is easy, you might get stuck once in a while. When this happens, you will want to have a company that caters to your queries fast.
What do I need to qualify for an Emergency Loan?
Most emergency loan lenders accept borrowers with a low credit score. But be it as it may, it is not a guarantee that you will get the loan. You will first have to meet pre-qualifying requirements. These include;
- You should be above 18 years or 19 years (depending on the state you are from)
- You should be a US citizen
- You should reside in the state where the lender operates in and offers its services
- You should have an active bank account.
- You should have a constant income
- Your income should not be less than $800 for most lenders.
Why do lenders specify the amount you need to earn to qualify to get a loan? Simple. Because there is a law specifying how much you can repay per month, especially if it is an installment loan. For most states, lenders should not ask for more than 25% of your income every month and if you earn below $800, there is a chance this limit will be exceeded.
How do you get an Emergency Loan?
The process you follow to get an emergency loan depends on the systems the lender has put in place. For instance, some lenders provide the application form online while the others make it available through an app, and others still allow you to walk into their store locations or call them for an application. Regardless of the platform they choose to use, the documents you’ll need to provide are the same. These documents and information include:
- Your identity card
- Your bank details
- Your bank statement or income stub
- You will also need to provide your social security number
Once you fill the form, the lender will review the information you provide and determine if they approve or reject it. If they approve it, they also have to decide how much money they will offer.
This process takes a couple of minutes. After approval, you will get a loan contract containing all the loan details, including the loan amount, when you will repay, and how much you will repay every month or fortnight.
Emergency loans are designed to help you when in need. You get a small loan amount in a short time. However, you need to exercise caution with these loans because they are expensive. If you take an emergency loan, you should know where you’ll get money to cater to the loan. At the very least, you should afford to make a repayment with your next paycheck.
Be careful and patient enough to choose the best payday lender. Hurrying through the selection process will cause more harm than good. Always be on the lookout for positive reviews and scam companies. If the lender is not registered by relevant authorities in the state, you should stay away,
Can I get an emergency loan with bad credit?
Yes, you can. Most lenders market themselves as bad credit lenders, but this does not mean they will give loans to just anyone. They, too, have a lower credit score limit. This limit is usually 600 for most payday lenders.
Can I have the loan on the same day?
Yes, but only if you fill out the form on time and present necessary documentation. Also, if you opt for other payment methods aside from a bank deposit, there are chances the money will take longer to reach your account. Even with the processing delays, the maximum the loans can take is two business days. After all, they are called emergency loans for a reason.
Will it affect my credit score?
Most lenders don’t conduct a hard credit check. Because of this, it’s close to impossible that they will report your faithfulness or lack thereof to the top three financial bodies in the US. Your credit score will remain the same throughout your relationship with the company.
Do payday lenders have affiliate programs?
Some do, and some don’t. Affiliate programs are specific to the lender. However, those that do offer close to $50 in a loan amount increase. The reward is offered after your referral gets a loan.
Do I pay lateness fees?
Emergency loans want to help, but they are, first and foremost, a business. As such, they have to be strict on payment dates. If you miss them, they charge a fine. However, if you anticipate a hard time, call the lender before time, and explain your situation. The lender will come up with a payment plan, you can both agree on, and that will ease your repayment burden.
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