Interest on Emergency Loans Can Get ‘Ugly.’ Here’s What to Avoid When You Need Money Quickly

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Your pet needs life-saving surgery. A relative passed away unexpectedly, and you need to travel for the funeral. Your car breaks down and needs to be fixed. 

Whatever the scenario, an unplanned emergency expense can be devastating to your finances. 

According to a 2021 survey from the TIAA Institute, 30% of Americans couldn’t handle an unplanned $2,000 expense within a month’s time. Black and Hispanic Americans are disproportionately affected due to long-standing systemic inequalities in the economic system, with 41% of Black Americans and 40% of Hispanic Americans saying they would “certainly not” or “probably not” be able to cover the expense, compared to 27% of white Americans.

While emergency loans can provide you with fast financing, certain loans such as payday loans or car title loans may charge extremely high interest rates and fees that could cost you more in the long run. Here’s what you need to know about the most common types of emergency loans, which ones you should avoid, and what alternatives are available.  

What Is an Emergency Loan?

Emergency loans are personal loans used to cover unexpected expenses. You can use these loans to pay for emergencies like urgent repairs, medical bills, or funeral costs. With emergency expenses, you likely can’t wait several days for your loan to be disbursed, so look for lenders that offer quick loan disbursement. 

Pro Tip

When evaluating your emergency loan options, pay attention to interest rates and fees. A typical payday loan can have fees that equate to an APR of nearly 400%, making it difficult to get out of debt.

Emergency loans can be secured or unsecured. With secured loans, you have to use your property, often a car or other vehicle, as collateral to secure the loans. Unsecured loans are issued based on your creditworthiness alone and don’t require collateral. 

Some types of emergency loans, such as payday or car title loans, can have incredibly high interest rates and fees. “When you’re in a tough spot and need funds fast, the ease of access on payday loans can make it very tempting,” says Jeff Arevalo, a financial counselor with Greenpath Financial Wellness, a national non-profit credit counseling agency. “Once you get into those loans, getting out is difficult,” he warns.

6 Types of Emergency Loans

There are many different kinds of emergency loans, ranging from traditional installment loans to more predatory forms that charge exorbitant interest rates. Before taking out a loan, understand how each type works and what kind of fees to expect. 

1. Personal Loans

Offered by banks, credit unions, and online lenders, personal loans are installment loans, meaning that they are paid back in increments over a period of time. They are generally unsecured, and the loans are repaid over several years. Interest rates and fees can vary widely from lender to lender, but your rate is typically dependent on your credit score, income, and what other debt you may have. Disbursements times generally range from the same day you apply to several business days. To get the best deal, compare rates from multiple personal loan lenders

2. Payday Loans

When people need quick loans for bad credit, they often turn to payday loans. Payday loans are short-term loans for relatively small amounts. “What we traditionally see is between $300 to $1,000,” says Kim Cole, community engagement manager for Navicore Solutions, a non-profit credit counseling agency. 

“However, where they become ugly is the interest rate and fees,” Cole says. With APRs that can be as high as 400%, taking out payday loans for emergencies can start a terrible cycle of debt. “It’s probably the most expensive, least-consumer friendly product out there,” Cole adds.

With a payday loan, you repay the loan in a lump sum by your next payday — usually within two to four weeks after the loan is issued. The lender will typically require you to write a post-dated check for the full amount owed, and they will cash the check on the due date regardless of how much money is in your account. If you can’t afford to repay it, you can roll the loan over into a new loan — putting yourself even further into debt. 

3. Car Title Loans

Another option for people looking for quick loans for bad credit is to take out a car title loan. Like payday loans, car title loans are short-term loans for relatively small amounts with high interest rates and fees. However, payday loans are unsecured, while car title loans use the title of your vehicle as collateral. 

“If you default on a title loan, you are in danger of surrendering your title and car,” cautions Arevalo. “It’s your transportation, your way of getting to your job or doctor’s visits. There is certainly risk involved,” he adds.

4. Cash Advances

If you have an existing credit card, one way to get funds quickly is with a cash advance. With this approach, you use your credit card to take out cash through your bank or at an ATM. You can pay back the cash advance as part of your credit card payment. 

However, keep in mind that credit card companies usually charge higher APRs on cash advances than purchases. There is also usually a cash advance fee that is a percentage of the amount used. 

“[Credit card cash advances] aren’t my first choice,” says Cole. “But a credit card or cash advance at 25% interest is a lot better than a payday loan at 400%,” she says. 

5. Payday Alternative Loans

If you need an emergency loan and want to avoid predatory payday loans or car title loans, you may be able to qualify for a payday alternative loan (PAL). 

PALs are offered by some credit unions to give their members an option to get money quickly without turning to payday loans. You can usually borrow between $200 and $1,000 and have up to six months to repay the loan in installments. The maximum interest rate that federal credit unions can charge on PALs is 28%, as mandated by the National Credit Union Administration (NCUA). While that’s still fairly high, it’s significantly lower than the rates you’d get with a payday loan or car title loan. 

6. Pawn Shop Loans

At a pawn shop, you can use items as collateral. Anything from gaming systems to jewelry can be used to secure a loan. The pawn shop will give you cash in exchange for the item; if you pay off the loan by its due date, you get the item back. If you don’t, the pawn shop keeps it and can resell it to recoup their money. 

The interest rates on pawnshop loans are often lower than you’d find on some other emergency loans. Just keep in mind that you risk losing the item you pawned if you can’t keep up with the payments. “Pawn shops wouldn’t be my first recommendation, but they’re not nearly as bad as car title loans or payday loans,” says Cole. “The thing about a pawn loan is you are never going to get the amount that your item is actually worth. But the pawn industry is very regulated as opposed to some of the other predatory lending,” she says.

How to Choose an Emergency Loan

When deciding which type of emergency loan is best for you, consider the following: 

  • Annual percentage rate (APR): An APR is an interest rate that includes all the fees and costs of a lending product. With some forms of emergency loans, such as car title loans and payday loans, APRs can be well into the triple-digits. Interest can accrue rapidly, so you can end up paying three or four times the amount you originally borrowed. Carefully review the loan disclosure to see what the APR is and how it affects your total repayment cost. According to the National Consumer Law Center, 36% is the recommended cap for small loans because it gives you payments that you actually have a chance of being able to pay. 
  • Repayment Term: Depending on the type of loan you use, you could have weeks, months, or years to repay it. With payday loans and car title loans, you usually only have two to four weeks. With personal loans, PALs, and cash advances, you can repay them over months or even years, making your payments more manageable. 
  • Fees: Emergency loans can have many fees, including origination fees. These fees can greatly add to your loan’s total cost and make it more difficult to get out of debt.  
  • Collateral: While personal loans, cash advances, and PALs are unsecured, some emergency loans are secured and require collateral. If you fall behind on your payments, you risk losing your property to the lender. Before choosing a loan that requires collateral, ensure that you have a repayment plan and budget in place. 
  • Time to Fund: Part of the reason why payday loans are so heavily used is because you can get cash on the spot. That’s a big advantage over some personal loans that can take several days to process. However, some personal loan lenders and PALs do offer quick loan disbursement, so shop around until you find the right match for you. 
  • Loan Amount: Most emergency loans are relatively small — often between $200 and $1,000. If you need more than that, personal loans may be your best option since they usually have much higher loan maximums. 
  • Credit Requirements: If you have good to excellent credit, you have a lot more options than someone with bad credit. With a strong credit score, you can qualify for personal loans with relatively low interest rates, and you can have years to repay the loan. By contrast, emergency loans for bad credit tend to have high interest rates and very short terms. 

How to Get an Emergency Loan with Bad Credit

If you have poor credit or no credit history at all, it can be difficult to find a lender willing to work with you. However, there are some ways to improve your chances of qualifying for a loan: 

  • Add a Cosigner: If you have a friend or family member with excellent credit and a reliable source of income, adding them as a cosigner on a loan could help you get approved, even if your own credit is lacking. A cosigner will act as a guarantor on the loan, meaning the lender can require them to make payments if you fall behind. 
  • Use Collateral: If you cannot qualify for an unsecured emergency loan, you may be eligible for a secured loan if you have some form of property to use as collateral. You can use your car, motorcycle, or a boat as security on a loan. 
  • Visit a Credit Union:  As non-profit organizations, credit unions serve their members. They often have less stringent credit requirements than other lenders, and they may also offer free financial counseling

5 Emergency Loan Alternatives

Before turning to any form of debt to handle an emergency expense, consider these alternatives: 

1. Ask for Help

While reaching out to friends or family members for financial assistance can be difficult, it can be a much better solution than turning to predatory, high-interest loans. “Borrowing from family doesn’t always feel like the best thing, but if you’re talking about the difference between being evicted from your apartment, I say look to family,” says Cole. 

If you do ask for help, make sure you’re both clear on whether the money given to you is a gift or a loan. If it’s a loan, discuss repayment terms, whether it must be repaid with or without interest, and what payment terms they expect.  

2. Apply for a 0% APR Credit Card

If you have good to excellent credit, you may qualify for a 0% APR credit card. Some credit cards offer special 0% APR intro periods, typically 12 to 18 months. If you can pay off the balance before the 0% APR period ends, you won’t be charged interest at all. But be careful; if your balance isn’t paid off by the end of the intro period, you’ll need to pay high credit card APRs on the remaining amount. 

3. Contact Local Non-Profit Organizations

Depending on where you live, there may be non-profit credit unions or social service organizations in your area that offer financial assistance programs or low-interest loans. 

“I always recommend that people look for local resources in the area like 2-1-1, local charities, churches, rescue funds, or rental delinquency funds,” says Arevalo. 

You can call, text, or email 2-1-1 to get referrals to programs near you.  

4. Request a Pay Advance

If you’re currently employed, contact your employer’s human resources or payroll department. You may be eligible for a pay advance and get a portion of your next paycheck early. 

5. Ask Your Creditors for Forbearance

If you’re struggling with your bills and have a sudden emergency expense, contact your creditors and explain your situation to see if they can give you any relief. 

“Talk to your creditors to see if they can offer any forbearance or payment deferment,” advises Arevalo. “Even if it’s short-term, it can free up some funds,” he adds.   

Emergency Loans to Avoid

When you’re in an emergency, taking the time to do careful research can seem overwhelming and unfeasible. Try to understand the true cost of any loan you take out, and avoid any loan with an APR over 36%, according to the National Consumer Law Center. High interest rates make it much harder to get out of debt, as you could end up owing thousands more than you originally borrowed. 

While secured loans aren’t inherently bad, be sure you understand the risks before taking one out. Be especially careful about using collateral that you depend on in your day-to-day life, such as your car or your home. Losing your car or being evicted could upend your life and cause further problems. 

Building an Emergency Fund

After handling an unexpected expense, focus on improving your finances by building an emergency fund. Having money set aside for inevitable mishaps that occur can prevent you from needing to use payday loans or other sources of quick cash. 

The best way to start an emergency fund is through the slow and steady method, says Arevalo. 

“Set up automatic savings. Choose an amount that is comfortable and realistic,” he advises. “Even a small amount, $25 or $50 per paycheck, can add up,” he adds.

If you need help creating a budget or paying off debt, consider meeting with a non-profit credit counseling agency that offers free or low-cost counseling services. You can work one-on-one with a debt counselor to create a plan for your finances. 

To find a credit counseling agency near you, search through the U.S. Trustee’s Program database of approved agencies.