Emergency loans: What they are and how they work

Emergency loans can help you pay for urgent expenses, such as medical bills, auto repairs, or lost income. These personal loans can be offered by banks, credit unions, and online lenders, and in many cases, you don’t need to provide collateral. Emergency loans also typically feature fast funding.

If you’re thinking about applying for an emergency loan, here’s what to know first.

What are emergency loans?

Emergency loans let you borrow money for urgent, short-term bills and repairs that cannot wait until your next paycheck or to navigate a time-consuming application process. Usually, you borrow a small amount as a personal loan or cash advance with a quick payoff plan.

How emergency loans work

Emergency personal loans generally provide a quick application process and funding possibly as soon as the same day or next business day after approval, depending on the lender.

Here are some of the main aspects to consider when comparing emergency loan options.

Loan amounts

Lenders have different minimum and maximum borrowing amounts. Depending on the type of loan, you might be able to borrow as little as a few hundred dollars up to $100,000. Exact loan amounts will vary by lender as well as by other factors like your credit score. You’ll typically need good to excellent credit to qualify for the highest loan amounts.

Funding speeds

Determining how quickly you need to receive your money can help you decide which lender to pursue. With most lenders, you could see your funds arrive in your bank account within one to three business days.

There are also lenders that provide funding as soon as the same business day after approval. In some cases, you might need to have an existing banking relationship to qualify for same-day funding. Expedited funding via wire transfer might be available in some cases, though this could incur a wire-transfer fee depending on your bank or credit union.

Minimum credit score

The credit score you need will depend on the type of emergency loan and the lender. For example, while many emergency personal loan lenders require good credit (meaning a credit score of 670 or higher), others accept lower scores. In general, you’ll need good to excellent credit to qualify for the best rates and terms.

Other options, such as a loan through a cash advance app, might not require a traditional credit check or might perform only a soft credit check that won’t hurt your credit score.

Learn: How personal loans affect your credit score

Repayment term

Your repayment term will depend on if you opt for an emergency installment loan or revolving credit line. Installment loans (such as personal loans) distribute the entire loan amount upfront in a lump sum, and you’ll repay the balance in fixed installments. These loans typically have repayment periods from one to seven years, depending on the lender.

In comparison, revolving credit lines (like credit cards) feature an open-ended repayment. This allows you to draw from your credit limit on an as-needed basis You can also make just the minimum monthly payment in many cases, though this could mean racking up hefty interest charges. In general, it’s best to pay off your credit lines or make extra monthly payments whenever possible to minimize your overall interest.

Interest rates and fees

Your potential interest rates and fees differ by loan type. It’s a good idea to consider the loan’s annual percentage rate (APR) when comparing options. APR includes both the loan’s interest rate and fees, and it can give you a better idea of your total borrowing costs.

In general, secured and unsecured personal loans tend to have more budget-friendly rates and fees compared to options like credit card cash advances. However, the application requirements can also be stricter — particularly for unsecured loans, as they don’t require collateral and are therefore riskier for lenders.

Other options like cash advance apps might charge only fees instead of interest. Knowing this cost upfront is helpful, but it can be pricier than traditional interest for a similar balance.

Application process

The application process for an emergency loan will generally consist of the following steps:

• Compare lenders and pick a loan option. Be sure to shop around and compare quotes from as many lenders as possible. This can help you find a good deal and favorable terms for your desired loan amount. After you’ve done your research, pick the loan option you like best.
• Gather documents and apply. Once you’ve chosen a lender, you’ll need to submit a formal application. Gathering the required documents — such as your identification and proof of income — beforehand can help to expedite the process. After you’ve applied, you could get an approval decision the same day, depending on the lender. Respond to any requests for additional documentation quickly to avoid delays.
• Accept the loan and get your funds. If you’re approved, the lender will send you a loan agreement to sign. Review this carefully to assess the total fees and repayment requirements. Also make sure you can afford the minimum payment and that you understand the potential fees you might owe for missed or late payments before signing. Afterward, the lender will disburse the funds — often directly to your bank account.

Check out: How to get a personal loan

Risks of emergency loans

While emergency loans can be necessary in some situations, they can come with risks to consider first. Here are some common pitfalls to avoid:

• Never-ending debt cycle: Predatory short-term loans, such as payday loans, can come with aggressive repayment terms and sky-high APRs exceeding 400%. Not repaying the loan in full during your initial two to four-week term can require constantly renewing the loan and paying additional fees until the balance is paid in full — essentially trapping you in a continuous cycle of debt.
• Excessive fees and penalties: Predatory lenders might charge excessive interest, origination fees, and prepayment penalties as they know you need money in a pinch. It’s best to borrow from reputable lenders that offer traditional financing (like emergency personal loans) to minimize this risk.
• Overborrowing: You might borrow more than you need to satisfy the lender’s minimum requirements or because you qualify for a higher limit. While this can be tempting, taking out a bigger loan means paying more in interest and fees. Borrow only what you need to avoid taking on unnecessary costs.
• Collateral loss: If you opt for an emergency loan secured by collateral (such as your vehicle), you could lose that property if you don’t keep up with your payments.
• Damaged credit: Missing payments or paying late can damage your credit score. Negative credit events like these will also stay on your credit report for seven years and make it more challenging to qualify for future loans.

Types of emergency loans

Several types of emergency borrowing options can provide funding as soon as the same or next business day after approval. In most cases, you should have reasonable rates and repayment terms.

• Personal loans: These loans can range from a few hundred dollars up to $100,000, and they often have some of the lowest interest rates and fees compared to other options. However, emergency personal loans can also have stricter credit requirements, particularly if they aren’t backed by collateral. Repayment terms can range from one to seven years, depending on the lender.
• Credit card advances: If you have an unsecured credit card, you can request a cash advance from an ATM, at a local bank branch, or by convenience check. In addition to paying interest at a high variable APR, you can anticipate a one-time fee that’s typically 3% to 5% of the advanced amount.
• Credit cards: You could also try to get approved for a new credit card to take advantage of a low-interest promotional APR. Some card issuers permit qualifying customers to access their credit limit as soon as they’re approved.
• Paycheck advances: Your employer’s payroll app might partner with a third party to deposit part of your future income a few days early with no credit check required. This method is safer and cheaper than traditional payday and cash advance lenders.
• Payday alternative loans (PALs): Participating credit unions allow members to borrow up to $1,000 with a short repayment term of one to six months. Current National Credit Union Administration (NCUA) banking rules cap application fees at $20.

Find out: Does opening a new credit card hurt your credit score?

When to consider an emergency loan

Emergency loans provide funds when you need them the most. For example, you might consider an emergency loan for the following expenses:

• Car repairs
• Family emergencies
• Groceries
• Home repairs
• Lost wages from losing a job
• Medical bills
• Natural disasters
• Rent
• Utilities

Pros and cons of emergency loans

Here are some of prominent advantages and disadvantages of emergency loans to consider:

Alternatives to emergency loans

If an emergency loan doesn’t seem right for your situation, you could consider the following alternatives:

• 401(k) loan: Borrowing from your retirement savings won’t impact your credit score. However, downsides can include having to repay your balance immediately if your employment is terminated, taxes and penalties on defaulted balances, and missed investment opportunities.
• Loan from friends or family: Borrowing money from trustworthy friends or relatives can be a vital lifeline when you have minimal credit or no collateral. However, be careful to set out a clear repayment plan and stick to it to avoid damaging your relationships.
• Payment plans: If you need to cover medical services, in-house payment plans might be available through the service provider or medical office. Staff members might also recommend hardship assistance programs.