Emergency Loans

You can budget and save but emergencies do arise that even our best financial planning can’t account for. Your car may breakdown, emergency medical treatment might be needed, you might be short on tuition, or your home may be damaged during a natural disaster – these are all instances when an emergency loan might save the day.

Emergency loans typically have an instant eligibility decision. Funds are available in your bank account within 24 hours and you repay the debt via monthly Automated Clearing House (ACH) payments. These loans are specifically meant for real emergencies, meaning they are very short-term and can often carry a high interest rate. The best resources for an emergency loan are your primary bank, credit union, or other financial institution, though there are other lenders that provide such borrowing opportunities.

First and foremost, any proper financial plan includes the requirement for you to deposit some of your monthly earnings into an emergency fund. Whether you have this segregated as a separate bank account, or you’re just putting cash in a jar, your emergency fund is meant to help cover off real emergent situations such as paying your insurance deductible after a car accident, repairing a tooth that isn’t covered by your health plan, clearing your basement of flooding after a major storm, or fixing a leak in your roof. You don’t necessarily need to have thousands of dollars in this fund. But, if you do some research on common life emergencies, you can determine a mean amount that you should have on-hand at all times. Example: Your deductible for your car is $500, the average dental crown is $900, and fixing a small hole in your roof could cost as much as $1500. Though you should always strive to have the maximum amount in your account (in this case $1500), the mean amount would be 500+900+1500/3 = $966. This means that you have enough to cover off the first two identified emergencies and you’re well within range of being able to pay for the last emergency as well.

So, you have $966 in your emergency fund. How do you get the rest? The answer is an emergency loan, which is usually and unsecured personal or signature loan. If you have even less-than-perfect credit, an emergency fund with some cash in it, and a real emergency that you’re dealing with, it is very likely that any bank, credit union, online lender, Peer to Peer (2) lender, or other financial institution will take the chance on lending the remaining amount to you, especially if you’re offsetting more than two thirds of the amount with your own cash. Your savings show lenders financial maturity, which means you have a household budget that demonstrates financial responsibility. Most loan providers will identify this and help you ensure your emergency doesn’t become a catastrophe.

In most cases, emergency loans can be approved and funded the same day or within 24-48 hours. The loan application process is the same as any unsecured loan: You will need to provide information such as your full name, identification, verification of your residential address, your date of birth, your Social Security number, information about your employment and income, and likely details regarding your current debt and monthly mortgage or rent obligations. This information is used to check your credit record and FICO score as well as determine your debt to income ratio, which lets lenders know how financially capable you are to take on new debt. Most financial institutions now have online applications, meaning that you can complete all of the application requirements without stepping foot in the bank and be provisionally approved for the loan prior to handing over your verification documents. This process saves you and the bank time. Once you are approved, it’s just a matter of sending in your pay stubs, or W-2 form, along with your identification, a utility bill as proof of address, and possibly a scan of your Social Security Number card (though you may not need to send this in if you’re taking out the loan from your primary bank). If all of your documents are in order, it is very possible that the lender will immediately issue you a check or deposit the funds in your bank account.

Emergency loans are generally fixed term and interest rate. The Annual Percentage Rate (APR) that you pay will likely be determined on your credit score, the amount you’re borrowing, and your debt to income ratio. Conventional banks and credit unions will offer the most competitive APR, fee structure, and terms. The term could be as little as a couple of months to multiple years. Online and P2P lenders will be less competitive because they have less strict application requirements, including allowing you to apply for a loan with average or even bad credit. This means that they have to offset their risk by lending at a higher interest rate to increase their reward. Be certain to shop around for the loan that is right for you, and if possible compete multiple lenders against each. It is also important that you find a loan that doesn’t have prepayment penalties. Some lenders do charge you a one-time lump sum fee in the event you pay part or all of the balance ahead of schedule. Though this doesn’t make sense, it is one way that lenders are able to make money off their loan even if you don’t hold the loan for the full term. Read the loan agreement’s fine print carefully to know what you’re getting yourself into.

Your monthly installment payment on the loan is usually directly debited from your savings or checking account using ACH. This is a preauthorization for the lender to take the required payment amount directly from your account without you having to manually make the payment online, write a check, or otherwise. You probably make direct debit payments on other bills such as utilities, so you should be familiar with how the system works. This is the best option for making payments on the loan given that you won’t be late as long as your account has enough funds in it to cover the withdrawal.

Tip 1: Emergency loans should only be taken out if you or your family are facing dire circumstances entirely outside of your own control. An emergency loan is still debt, meaning it has to be paid back. So, even if you have no choice but to take out the loan, you should do so with caution as you will be responsible for repaying the loan just like any other unsecured loan. The best thing you and your family can do is plan for as many types of contingencies as possible. Having cash in the bank will either help you cover down on the expenses associated with an emergency, or at least give you upfront funds to offset or start paying down any borrowed amount. As previously noted, if you show financial maturity by establishing and building an emergency fund, financial institutions will always look on this favorably and will likely help you offset any additional emergency costs - even if you have a weak credit record or FICO score. Do not misrepresent your situation in an attempt to take out an emergency loan for other reasons. These are vetted lending facilities and any falsehoods could be grounds for disciplinary or even legal action by your financial institution.