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What are emergency loans?

An emergency loan is a personal loan you borrow to cover an urgent expense. Emergency loans are often unsecured, meaning the lender uses your personal information, including credit, income and other debts, to determine whether to offer you a loan and at what interest rate.

Emergency loans have annual percentage rates from 6% to 36% and amounts from $1,000 to $100,000. Lenders typically have minimum credit score and maximum debt-to-income ratio requirements for this type of loan. Some offer secured, co-signed or joint loans, which may be easier to qualify for.

Even in an emergency, taking time to compare personal loans and potentially cheaper options can save you money and help you avoid harmful lenders that damage your credit and finances.

How do emergency loans work?

A personal emergency loan is a type of installment loan, meaning you receive the money in a lump sum and repay it in monthly installments. Repayment terms are from two to seven years. These loans have fixed interest rates, so you’ll have the same monthly payment for the life of the loan.

Most reputable lenders report loan payments to the three major credit bureaus, so your payments factor into your credit score. On-time payments help your score, while missed payments can hurt it.

Other types of emergency loans

High-interest loans, such as pawn, car title and payday loans, should be considered as a last resort after you’ve exhausted all other options. These emergency loans can be fast and easy to get, but they could do long-term financial damage.

No-credit-check installment loans: Some no-credit-check installment loans share similarities with payday and auto title loans. They’re available online and at storefronts. These lenders don’t review your credit score or history to determine whether you’re able to repay the loan and what a fair rate would be, which is why many no-credit-check loans charge rates above 100%.

Repayment terms on these loans may be longer than you need, resulting in exorbitant interest costs over the lifetime of the loan.

Pawn loans: Pawn loans require you to hand over a valuable item to a pawnshop. The shop assesses the value and gives you a loan for that amount. You have to repay the loan, with interest, or the pawnshop will keep your item. APRs can reach above 100% on this type of loan.

If you repay the loan but it takes too big a bite out of your bank account, you could end up borrowing from the pawnshop again.

Car title loans: With car title loans, a lender assesses the value of your vehicle and lends you a percentage of that amount. If you accept, the lender holds the car title and you receive your loan. The lender doesn’t usually review your ability to repay the loan and can charge APRs of 300%.

If you can’t repay the loan, the lender will take your car.

Payday loans: Payday loans are high-cost, short-term loans that even in an emergency are risky. Payday lenders charge fees that can equate to APRs of 400%, don’t check your credit score and may not confirm your ability to repay the loan.

Borrowers who aren’t prepared to repay the loan on their next payday often borrow again, causing them to slip into a cycle of debt.

Best uses for emergency loans

Though lenders may ask why you’re borrowing, there are few restrictions on how you can spend the funds from an unsecured loan. Examples of emergencies you can pay for with a personal loan include:

• Medical or dental bills.

• Home repairs.

• Car repairs.

• Bills after a loss of income.

• Unexpected travel expenses.

How to choose an emergency loan

Calculate the monthly payment. Weigh how the loan’s monthly payments will impact your budget to determine if you can comfortably pay it on time. Use a personal loan calculator to see how the rate and repayment term affect the monthly payment.

Compare interest costs. The loan with the lowest APR is the least expensive overall. You can use APR to compare emergency loans with other financing options. A loan with a long repayment term may seem appealing because it has a low monthly payment, but it also costs more in total interest. Look for a loan that balances affordable monthly payments with reasonable interest costs.

Check for fees. The most common fee to look for on a personal loan is an origination fee. This can be 1% to 10% of the loan amount, and it may be subtracted from the loan before you get the funds.

Ask about funding speed. If you urgently need funds, consider a lender that offers fast funding. Some lenders can fund a loan the next day, while others could take up to a week after approval. Online lenders often disclose the timeline in an FAQ or blog section of their websites.

Compare emergency loans

How to get an emergency loan

1. Check your credit. Most lenders prioritize applicants’ credit scores in a lending decision, so check your credit report for any past-due accounts or errors, and correct them before submitting an application. You can view your report from all three credit bureaus at AnnualCreditReport.com.

2. Determine what you can afford. Review your monthly budget to determine how much you can afford to pay toward the loan each month. That way, when you’re comparing loan offers, you can choose a payment that best fits your budget.

3. Pre-qualify and compare offers. Even if you’re in a hurry, it’s worth the extra time to find a good rate on a loan you’ll be repaying for a year or more. Most lenders let you pre-qualify online to preview the loan’s rate, amount and repayment term. Pre-qualifying takes a few minutes, and no matter how many times you do it, your credit score is never affected.

4. Gather documents and apply. Once you have a loan offer with affordable monthly payments, find the documents you need to apply for a personal loan. This usually includes W-2s, pay stubs, a government-issued ID and proof of address. You could get an instant approval decision, but it’s more common for it to take a day or two.

How to get an emergency loan with bad credit

A bad credit score (below 630) doesn’t automatically disqualify you from getting a loan, but many lenders weigh your credit score heavily on an application.

Add a co-signer or co-borrower: A co-signer or co-borrower can help your chances of qualifying or getting a good rate. A co-borrower has equal access to the funds, while a co-signer does not. If you can’t make loan payments, the co-signer or co-borrower is responsible for the payments.

Add collateral: Some lenders offer secured personal loans and consider the item used as collateral (usually a bank account or vehicle) when assessing an application. Adding collateral can improve your chances of qualifying, but the lender can take the collateral if you miss too many payments.

Add up income streams: Your monthly income is another important factor on your application. Most lenders want to see that you have enough to pay your regular expenses, make the new loan payment and have a little leftover. Many lenders consider things like Social Security, alimony or child support as part of your income.

Where to get an emergency loan

Online lenders: Online lenders usually allow you to check your rate before applying and offer a fast application process. But predatory lenders will try to exploit your emergency. Find a reputable lender that caps rates at 36% — the highest APR affordable loans can have, according to most consumer advocates — and review your credit and income to ensure you can repay the loan.

Banks: Many banks prefer borrowers with good or excellent credit (690 or higher), but there are some exceptions. Some large banks, like U.S. Bank and Bank of America, offer small loans that can cover emergencies. You must be an existing customer to get this type of loan, but the fees are much lower than what payday lenders charge.

Credit unions: Credit union members may have the most affordable emergency loan option. Federal credit unions cap personal loan APRs at 18%, lower than many online lenders. A credit union may consider an applicant’s membership history, in addition to their credit and income, to make a loan decision. Some credit unions offer payday alternative loans, small-dollar loans with low rates that are repaid over six months to a year.

Emergency loan alternatives

Cheaper alternatives to borrowing aren't always fast or convenient, and sometimes they require asking for help. But NerdWallet strongly recommends exhausting alternatives first, even in an emergency. Here are some possible alternatives to an emergency loan.

• Explore ways to pay off medical bills, like a payment plan or income-driven hardship plan.

• Ask your employer for an emergency loan or paycheck advance — or consider using a loan app, like Earnin or Dave.

If you're comfortable with it, ask family and friends for a loan through lending circles or a family loan.

Tips for building an emergency fund

Though it won’t get you through today's emergency, starting an emergency fund can help you avoid borrowing in the future. Here are a few tips to build an emergency fund.

Decide how much you need. Most financial experts recommend saving three to six months’ worth of living expenses. Use an emergency fund calculator to determine how much you’d need to live comfortably without working for a few months.

Start small. Three to six months’ worth of expenses can seem ambitious if you’re starting from zero. It may be easier to begin with a goal of $500, which can cover smaller emergencies, and work your way up. A smaller monthly savings goal can help you get there.

Automate your savings. Once you know how much to save from each paycheck, cut out the potential human error. Many banks allow you to set up recurring transfers from your checking to a savings account. If your employer offers direct deposit, have them deposit part of your paycheck into a second account.

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