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

The advantage of an emergency loan is it gives you access to quick cash if you’re faced with an urgent, unexpected expense. Many borrowers choose personal loans for emergencies because of how easy they are to qualify for and how quickly you can get the funds to pay for costly vehicle repairs, hospital repairs, medical or dental bills or other household expenses.

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.

Understanding the pros and cons of an emergency loan before you need one can give you the peace of mind of having a backup plan if the unexpected happens.

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 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, 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 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.

Less impact to your credit score than revolving debt

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.

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 car utilities.

• Unexpected home repairs that affect your home’s safety. 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 someplace 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 mor time to repay the loan while you’re grieving the loss.

The bottom line

Emergency loans can be a viable solution for cash-strapped consumers. They’re easy to apply for, flexible and offer fast funding times. Still, these loan products have downsides, like higher borrowing costs, that should not be overlooked when deciding if they’re a good fit.

Be sure to shop around and check your prequalification offer from at least three lenders. Compare the loan amounts, terms, interest rates, fees and funding times for each loan offer you receive. It’s equally important to evaluate each lender’s reputation and customer service reviews to make an informed decision.

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.