Emergency loans: What they are and how to get one

Unexpected expenses are a part of life. If you need to cover emergency costs, such as medical care or home repairs, you might be looking into an emergency loan. But before you take out an emergency loan, it’s important to know how they work and what your options are. 

Keep reading to learn more about different types of emergency loans, some alternatives to consider and how to prepare for future emergency expenses.

What you’ll learn:

• Emergency loans generally refer to unsecured personal loans that borrowers can access quickly once they’re approved. 

• Alternatives to emergency loans include setting up a payment plan or applying for a no-interest or low-interest credit card. 

• Having little to no credit history can make borrowing money more challenging, but you may still have options. 

• To help deal with unexpected expenses in the future, consider building an emergency fund.

Emergency loans are short-term loans that are typically used for emergency situations, like medical bills, home improvements, car repairs and other financial emergencies. The funds could be available the next business day or even the same day. 

Some emergency loans may be riskier and have higher interest rates than others. As with any loan, it’s important to understand the details, terms and conditions before borrowing.

Generally, emergency loans could be used to cover expenses related to: 

• Medical bills

• Dental bills

• Home repairs

• Car repairs

• Veterinary bills 

• Funeral expenses

With some emergency loans, you may get faster approval compared to other loan types. And the funds may be deposited into your account within a day. Then you’ll typically repay the loan with fixed monthly payments over a set time period.

Here are some important things to know about emergency loans: 

• Higher credit scores typically help. Lenders may set your terms based on a variety of factors. But higher credit scores almost always help you get a better interest rate and more favorable terms. 

• Repayment terms can vary widely. Some emergency loans are installment loans, which require monthly payments over a certain period. But how long you have to pay back the loan can vary. And it’s important to make sure you’ll be able to pay back the loan on time. 

• Collateral may be required. Some emergency loans may be secured loans, meaning they require collateral. And that collateral could be taken in the case of default. Secured loans may also come with relatively short repayment terms and high interest rates. 

• A hard credit inquiry might be needed. Applying for an emergency loan may result in a hard credit inquiry, which could impact your credit scores. Typically, one hard inquiry won’t have a large impact on your credit scores. But many hard inquiries in a short period of time may have a more significant effect. 

• Some loans may charge origination fees. These fees can reduce the amount you receive by a given percentage. Make sure you know about these and any other fees associated with the loan.

Taking out any kind of debt can have long-term effects on your finances. So it’s important to consider the potential benefits and drawbacks of emergency loans to ensure you’re making an informed decision.

An emergency loan could be beneficial if it provides quick access to the funds you need and offers flexibility when using the funds.

Like any debt, there could also be drawbacks to emergency loans. If the interest rates and fees are more than you could manage, that could affect your finances and ultimately your credit. Plus, taking on additional debt adds another payment to manage.

Any loan you can get on short notice to cover emergency expenses may be considered an emergency loan. However, some may have predatory interest rates and come with more risk than others. Here are some common types of emergency loans.

Personal loans are typically unsecured, so you won’t need to put up any collateral to get the loan. However, you might need good to excellent credit scores to qualify for the best terms and rates for an unsecured personal loan. 

Compared to some other types of loans, emergency personal loans may have shorter repayment terms that can range from a few months to a few years. And since personal loans are generally a type of installment loan, they typically require regular monthly payments to pay them off.

Payday loans are usually short-term loans meant to be repaid by a person’s next paycheck. They can have very high interest rates. If you don’t have the funds to cover the full loan amount when repayment is due, you may be subject to rollover fees, late fees and more. 

Credit checks aren’t usually required for payday loans, which may make it easier to get funds if you don’t have great credit. But these loans can come with a hefty price, with some lenders charging an annual percentage rate (APR) of nearly 400%, according to the Consumer Financial Protection Bureau. For this reason, experts generally suggest you avoid payday loans entirely, if possible.

Title loans use your car as collateral and let you borrow money against your vehicle. They’re typically short-term, high-interest loans for people who don’t have good credit. If you don’t repay the title loan, the lender can repossess your car.

Many title loan lenders require borrowers to own their cars outright. This means someone who’s still making payments on their vehicle would need to look at other loan options.

Emergency loans might be available from banks, credit unions and online lenders. Loan types, fees and repayment schedules vary by lender. If you’re interested in an emergency loan, it’s important to find a trustworthy lender and to understand the terms of any loan.

When you apply for an emergency loan, you’ll typically follow these general steps:

1. Research emergency loan options to find a good fit for your situation and credit profile. If you have higher credit scores, you’ll likely have more options. 

2. Learn about how applying for a loan might affect your finances and credit. Remember, applying for a loan can result in a hard inquiry, which could affect your credit scores.

3. Compare lenders and loan terms and conditions, including fees, interest rates and repayment timing. 

4. Gather the required documentation and apply for the loan, if you decide it’s your best option. The application process usually requires identification, proof of income and personal information such as your address. From there, you could receive loan approval anywhere from a few minutes to a day or two.

It may be difficult to qualify for an emergency loan with favorable terms if you have bad or even fair credit. For example, while one lender may only require a minimum credit score of 300, another might require a credit score of at least 640.

Secured loans might be easier to qualify for. But they require collateral. And if you’re not able to make payments, that collateral could be repossessed.

Emergency loans can help in a pinch, but they can also be expensive and hard to qualify for. When dealing with a financial emergency, you may want to consider other options.

Some emergency costs can be paid using a payment plan. For example, you may be able to work with a hospital to pay medical bills in installments.

If you have a credit card, you could use a cash advance to borrow against your credit limit. But be aware that the interest rate could be higher and there may be a fee. And cash advances may not have grace periods, so you could accrue interest almost immediately.

Some credit cards offer low interest or 0% interest for a period of time. If you apply and qualify, a card with an introductory rate could help you cover costs and avoid getting into more debt. Keep in mind that when the introductory period ends, the card’s standard APR will apply to any remaining balance. 

You can learn more about Capital One’s low intro rate credit cards to see whether one could be a good option for you.

Setting up an emergency fund can help you financially prepare for the unexpected. 

Start by deciding how much you can comfortably put away each month. You’ll also want to set a savings goal and timeline. Having an emergency fund with at least three to six months of living expenses saved can be a good rule of thumb.

Once you’ve established a plan of action, consider opening a separate bank account. Putting your emergency savings into a separate, high-yield savings account could help you avoid spending that money on nonemergencies. You can also set up direct deposit to have money automatically put into your account. You may also want to add extra income from things like tax refunds, side hustles and bonuses to help you reach your financial goals faster.

Whether you need an emergency loan depends on your financial situation and the options available to you. These questions could help you get started:

• Is the financial situation urgent or time sensitive? If your timeline is urgent, you may need to pursue an emergency loan. But if you have time to save money, it may be beneficial to wait. 

• What are the costs and terms of the loan? Ask yourself whether you can realistically meet the financial requirements of the loan and whether the cost of the loan is worth it. 

• Is there an alternative for covering your unexpected costs? You may want to think about alternatives to an emergency loan to find the best option for your financial situation. For example, you could consider setting up a payment plan or applying for a credit card with a low introductory rate.

Emergency loans are short-terms loans that are generally used to cover unexpected costs. Everyone’s financial situation is unique. And so are the terms of each emergency loan. It’s important to do your research to decide whether an emergency loan is the best solution. 

For some people, a credit card may be an alternative to an emergency loan. You can compare the credit cards from Capital One to see whether there’s one that will meet your needs.