What is an Emergency Loan? – All You Need to Know

Sometimes, you may find yourself in unexpected situations requiring you to access funds urgently. In such scenarios, emergency loans can be of great help. If you want to learn how an emergency loan works and its pros and cons, then continue reading this article.

Emergency Loan Defined

An emergency loan is a personal loan offered to borrowers who need funds quickly. Lenders of this loan credit borrowers’ accounts with a lump sum of cash that attracts a fixed interest rate.

How Does an Emergency Loan Work?

When looking to obtain an emergency loan, you should check your credit score and then research lenders willing to grant you a loan based on your score. The process of obtaining an emergency loan doesn’t differ much from other personal loans. Firstly, the lender will require you to fill out an application, share your contact details, state how much you want to borrow, and provide documents showing your income information.

Once you submit your emergency loan application, the lender will review it and inform you whether it has been approved or rejected. If approved, the lender will send you a loan agreement to review. If you are satisfied with the details, you can sign the agreement to allow the lender to credit the loan amount into your bank account.

Types of Emergency Loans

These are the types of loans suitable for handling unexpected situations:

1. Payday Loans: In case you need a few dollars to settle an emergency, obtaining a payday loan is advisable. This loan allows you to access an advance on your monthly paycheck. Its biggest disadvantage is that it attracts higher fees than other emergency loans.

2. Title Loans: If you don’t mind using your car title to secure an emergency loan, then this option is for you. Title loans are ideal for individuals with bad credit.

3. Credit Card Cash Advances: Some credit card issuers allow customers to borrow money from their line of credit to handle emergencies.

Where Can You Get Emergency Loans?

Most financial institutions offer emergency loans. They include:

1. Banks: You can access fast funding from your bank as long as you meet the set requirements. Note that each bank charges varying fees and interest rates.

2. Credit Unions: You need to be a member of a credit union to obtain an emergency loan. Interest rates charged are usually competitive.

3. Online Lenders: These lenders do not have strict requirements and are known for processing loans within a few minutes.

Requirements and Eligibility

There are several factors that lenders consider before giving you an emergency loan. Some include:

1. Identification: A lender expects you to share a copy of your identification document, like a passport, driver’s license, or ID card. Moreover, you can submit a utility bill bearing your name as proof of address.

2. Citizenship and age: Some lenders usually provide loans to specific citizens. So, check whether the lender you want to borrow a loan from serves your country. Also, you must be 18 and above to obtain a loan.

3. Credit Score: Each bank has its own minimum credit score requirement. If the requirement is considerably low, you are likely to pay high interest rates.

4. Income: Most lenders will want to determine your ability to repay your emergency loan. Therefore, you have to submit documents like bank statements or pay stubs as proof of income.

5. Reason for the Emergency Loan: Some lenders will require you to specify the reason for applying for an emergency loan.

Advantages and Disadvantages of Emergency Loans

Advantages

Access funds quickly: Lenders of emergency loans provide funds quickly to allow borrowers to handle any unexpected expense.

Flexibility: Borrowers can use emergency loans to pay for almost all expenses, from a car repair to a medical bill.

Disadvantages

High Interest Rates: Compared to loans like home equity, emergency loans attract higher interest rates.