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

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.

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?
  • 6 Types of Emergency Loans
  • How to Choose an Emergency Loan
  • How to Get an Emergency Loan with Bad Credit
  • 5 Emergency Loan Alternatives
  • Emergency Loans to Avoid
  • Building an Emergency Fund

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, no credit check payday loans Ooltewah TN 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.