Why Are Personal Loans Good For Emergencies?

The main points

Personal loans can be a great alternative to paying for emergency expenses because they offer the same flexibility as credit cards, but at a much lower cost.

Some of the advantages of using a personal loan for emergency financing include fast financing, fixed interest rates, and flexible repayment terms.

However, these loans are issued on a credit basis, so the higher your score, the better interest rate you can secure.

A recent Listick survey found that only 43 percent of Americans can afford a surprise $1,000 bill. If you can afford it, it may require resorting to swiping your credit cards, however, a personal loan may be a better option.

Personal loans usually come with lower interest rates than credit cards, and many lenders offer same-day approval and next-day financing. The interest on these loans is also fixed - so you won't have to worry about prices going up and down, which often happens with credit cards. In addition, lenders place few restrictions on how the money can be used, making it a good alternative for covering almost any emergency expenses.

Why are personal loans good for emergencies?

Personal loans provide fast financing, lower interest rates than other credit products, and you can use the money for almost any expenditure. This combination makes it a great alternative if you're on a budget.

Instant funding

Unexpected expenses can arise at any time and, at times, may require your immediate attention. For example, if your car engine breaks down, you will need to fix it as soon as possible because you depend on your car to get around.

The majority personal loan lenders provide short online applications that may be done from the convenience of your own home. Not only that, but many offer same-day decisions and instant funding. Depending on the lender, you can deposit money directly into your account within hours of approval.

Competitive interest rates

If you take a look at the interest rates on credit cards, you will see that they are much higher than on personal loans. In fact, the average credit card rate is currently just under 21 percent, while the average interest rate on personal loans is just 11.29 percent. However, personal loan rates can be as low as 4.6%, but to secure that rate, you'll need excellent credit.

A lower interest rate can save you thousands of dollars in the total cost of your loan. If you don't have the best credit but still need an emergency personal loan, don't worry. Many online lenders have more lenient requirements than other financial institutions and may consider factors such as your educational background and employment history when determining whether or not you qualify for a loan.

Flexibility

Personal loans also come with flexible repayment terms. Most lenders offer loan terms of between two and five years, which is beneficial for several reasons.

You'll likely find an affordable monthly payment that fits your budget, especially if you're getting a competitive interest rate. And you won't pay as much interest as you would with a credit card because it's already included in the monthly payment when you take out a personal loan.

The loan amount is also flexible. Depending on the lender, you can borrow as little as $1,000 or as much as $50,000. There are also very few restrictions on what you can't use the money for.

What are the disadvantages of using emergency loans?

Personal loans can be useful if you are facing an emergency situation. However, it is not the right solution for everyone.

Best prices reserved for good credit

Although there are dozens of lenders that work with borrowers with bad credit, you may encounter higher rates. They won't be as high as most payday loans - but they can compete with higher interest credit cards. To qualify for the best rates, you'll need a good to excellent credit, which is generally considered to be a score of 670 or higher. If you don't, an emergency personal loan can be a good option, but you should also consider other alternatives.

Additional fees can be a huge additional cost

Some personal loans do not have any costs. But many of them will have late fees along with origination fees and prepayment penalties. Late fees can be avoided, but the origination fee -- which is converted to your loan's APR -- is a common cost. Lenders can charge up to 10 percent of the loan amount as a collection fee, which automatically translates to higher borrowing costs.

Collateral may be required

Personal loans are often unsecured, which means that you are approved based on your credit and income. However, some lenders may require collateral - additional property that secures your loan in the event of default. This means that lenders can seize your assets if you don't keep up with the payments.

This is often the case when you turn to bad credit lenders. Without collateral, you may face higher rates or not be approved for a loan.

What can I use emergency loans for?

Medical costs and repairs are the most popular reasons for emergency loans, but they may be used to cover practically any need.

Medical bills: If you or a loved one has to go to the emergency room, for example, and your insurance policy doesn't cover the entire trip, an emergency loan can cover the out-of-pocket expenses. Depending on your insurance policy, health care costs can range from 10 percent to 100 percent of the cost of your service. They can quickly add up to thousands or tens of thousands of dollars or more.

Car Repairs: No matter what kind of car you drive or how new it is, chances are it will need repairs at some point. An emergency loan can pay for a simple repair like new brakes or a more complex repair like a new transmission. According to AAA, regular repairs usually cost between $500 and $600 or more.

Home Repairs: A leaky faucet, a running toilet, a broken furnace, and cracked siding are all examples of problems you may encounter as a homeowner. Fortunately, an emergency loan can help you keep your home in good shape when the system breaks. Home repair costs vary greatly, but HomeAdvisor estimates they range from $3,984 to $22,584.

Daily Bills: If you lose your job, cut back on your hours, or are unable to work for some reason, you may need an emergency loan to pay your mortgage or rent, utilities, groceries, and other bills. You may need to take it. While monthly bills depend on a number of factors, including your family's size and location, the average American family spends $2,003 per month on household bills.

Where can I get emergency loans?

Emergency loans are offered by credit unions, banks, and online lenders. Here's what you should know about each option to determine the best one:

Credit unions: Credit unions can give you a loan whether you have good or bad credit. The caveat is that you must be a credit union member to be eligible for its products and services.

Banks: If you apply for an emergency loan from a traditional bank, you will likely meet the higher credit score or income requirements. Furthermore, you may not receive the payments as quickly as you require.

Online Lenders: Online lenders can process your entire application online and get you the money you need fast. Most of them also allow you to pre-qualify so you can see what loan rates and terms you may qualify for before applying. This can help you avoid many difficult credit checks that can affect your credit.

Top 3 emergency loan lenders

These lenders are worth considering if you're facing an unexpected financial emergency and need quick cash:

Upstart

Upstart offers personal loans from $1,000 to $50,000 with terms ranging from three to five years. Upstart is an excellent emergency loan choice since the lender considers factors other than your credit score to determine if you qualify for funding. But if you have a strong credit rating, you may qualify for an annual interest rate as low as 4.6 percent, and no prepayment penalty. Funding is available as early as the following working day.

Avant

Avant caters to customers with good credit or limited credit history. They disburse the loan amount as soon as one business day after approval, and you can have access to between $2,000 and $35,000 payable over one to five years. Personal loan APRs vary from 9.95 percent to 35.97 percent, with a loan administrative charge of up to 4.75 percent. However, the lender is worth considering for financial emergencies because it is reached by people who do not have perfect credit and need quick financing.

Upgrade

Upgrades are another option if you need quick funding to cover emergencies. Like the other loans mentioned here, the loans are usually funded within one business day of approval. But what sets them apart are the extended loan terms - between two and seven years - which can make your monthly payments more affordable. Loan amounts range from $1,000 to $50,000 with an APR ranging from 8.49 percent to 35.97 percent. The minimum credit score requirement is just 600, and you'll pay original fees from 1.85 percent to 9.99 percent.

Bottom Line

Although no one wants to go into debt after an emergency, personal loans are a good alternative to credit cards or just paying bills.

If you are facing an urgent financial need, take a few minutes to compare loans from well-known lenders that have fast approval, and then apply for the loan that best suits your needs. Once you've paid off your urgent bills, you can make a plan to pay off your new debt. You should also start thinking about building an emergency fund to avoid similar problems in the future.