Emergency loans: Everything you need to know

Emergency funds are the backbone of financial health. Especially in today’s turbulent economy, having cash set aside for unexpected expenses is a necessity. However, sometimes emergencies come up when you least expect them. In this case, an emergency loan might be the only viable option to fend off an even bigger problem.

Emergency loans can provide immediate financial relief, but they can be damaging to your long-term financial wellness. Even though studying every loan in the wake of an emergency may not be possible, it’s important to know how the details will impact your wallet.

Before you apply, make sure you know all of the emergency loan options available to you, what the average interest rate looks like and how to spot red flags and misleading information.

What to know about emergency loans

Even though emergency loans are technically personal loans, they do serve a much different purpose than your standard run-of-the-mill loan. There are a few types of emergency loans and unlike other loans, those with bad credit may even qualify.

However, these differences, while helpful for some, do bring about some serious risks to consider. For example, many predatory loans (like payday loans) are often marketed as emergency loans toward borrowers with low credit. These loans are inherently risky and come with rates up to 400 percent.

Being educated about emergency loans’ terms and details is the only way to protect yourself from predatory or misleading practices. Here’s what you need to know when researching lenders and loan options.

What is an emergency loan?

One option for those with insufficient rainy-day savings is an emergency loan. This funding alternative covers your expenses in case of a large, unforeseen expense — even if you have less-than-stellar credit. There are a few types of emergency loans, but they almost always come with very short terms (usually weeks or months) and high interest rates and fees.

Depending on the type of loan and the lender, they can be accessible rather quickly – as soon as one business day or the same business day – and are often without the stringent lending guidelines you’ll find with some loans from traditional banks.

How do emergency loans work?

It depends on the type of emergency loan you choose. However, most are dispersed in a lump sum and payable in monthly installments over a set period. The loan term varies by loan product, and interest rates can be fixed or variable. If it’s the latter, your loan payments will likely fluctuate over time.

There are also unsecured and secured emergency loans. The latter requires collateral – like a vehicle title – to get approved. It’s also riskier since defaulting on the loan agreement means you could lose your asset

Benefits of emergency loans

Personal loans offer quick funding, lower interest rates than other credit products and you can use the funds for almost any expense. This combination makes them a great alternative if you’re in a financial bind.

• Quick funding: Most personal loan lenders offer quick online applications that can be completed from the comfort of your own home. Not only that, but many offer same-day decisions and quick funding. Depending on the lender, you may be able to get the funds directly deposited into your account within hours of approval.
• Competitive interest rates: The average credit card currently has an interest rate of just under 21 percent, while personal loans have an average interest rate of 12.21 percent. Rates for personal loans can be as low as 7.80 percent, but to secure that rate, you’ll need excellent credit. But be wary: Many predatory emergency loans have interest rates in the triple digits.
• Flexibility: Personal loans also come with flexible repayment terms. Most lenders offer loan terms between two and five years, which is beneficial for a few reasons. Loan amounts are flexible, too. Depending on the lender, you could borrow as little as $1,000 or as much as $100,000. Plus, there are very few restrictions on what you can’t use the funds for.

What emergency loans can be used for

The most common uses for emergency loans include medical bills and repairs, but they can be used to cover almost any expense.

• Medical bills: If you or a loved one has to go to the emergency room, for example, and your insurance policy doesn’t cover the trip in full, an emergency loan can cover the out-of-pocket costs. Depending on your insurance policy, out-of-pocket healthcare costs may be anywhere from 10 percent to 100 percent of the cost of your service. They can quickly add up to thousands or tens of thousands of dollars or more.
• Car repairs: No matter what type of car you drive or how new it is, there’s a chance it will require a repair at some point in time. An emergency loan may pay for a simple repair, such as new brakes, or a more complex repair, such as a new transmission. According to AAA, regular repair costs are usually between $500 and $600 or more.
• Home repairs: A leaky faucet, a running toilet, a broken furnace and cracked siding are all examples of issues you may face as a homeowner. Fortunately, an emergency loan can help you keep your home in optimal shape when systems break down. The cost of home repairs varies greatly, but HomeAdvisor estimates that they range from $3,984 to $22,584.
• Everyday bills: If you lose your job, get your hours cut or are unable to work for any reason, you may need to take out an emergency loan to pay for your mortgage or rent, utilities, groceries and other bills. While monthly bills depend on a number of factors, including your family size and location, the average American family spends $2,003 per month on their household bills.

Emergency loan statistics

• Over one-third of Americans have less savings in 2022 than they did the year before, while almost a quarter have more saved.
• Twenty two percent of Americans have no emergency savings.
• Nearly one third of Gen Zers reportedly don’t have any emergency savings, which is more than twice the amount — 15 percent — of Baby Boomers who report not having emergency savings.
• Personal loans — a type of emergency loan — have a record-breaking average interest rate of 12.10 percent.
• The average approved personal loan applicant has a credit score of 741.
• Borrowers with credit scores between 720 and 850 secure the best interest rates for personal loans, ranging between 10.73 and 12.50 percent.
• Those with credit scores between 300 and 629 typically have the highest rates, ranging from 28.50 to 32 percent for a personal loan.
• The average debt per personal loan borrower comes out to $11,116.
• Other types of emergency loans, like payday loans and car title loans, carry average APRs of close to 400 and 300 percent, respectively.
• Credit card cash advances, which are another type of emergency loan, have an average interest rate of 20.74 percent as of January 2024, and any amount borrowed starts accruing interest immediately.

Emergency loans and layoffs

• Although jobs in health care, manufacturing, professional and technical services have been increasing in the U.S., so has the overall unemployment rate to 3.7 percent. 
• As of December 2023, the number of unemployed persons in the U.S. is 6.3 million.
• The transporting and warehousing sector saw the largest amount of job cuts in December 2023, declining by 100,000 jobs since its peak in 2022.
• Meta, Amazon, Google and Microsoft are amongst the tech giants who have reduced their workforce by thousands in 2023.
• According to economists’ average forecast from Bankrate’s Fourth-Quarter Economic Indicator poll, unemployment is expected to fall to 3.7 percent by the end of December 2024.
• The typical severance package in the U.S. is one to four weeks of paid salary per each year the employee spent in the company.
• The average unemployment insurance benefit isn’t enough to get by. For example, the average weekly payout in North Carolina is $297.33 while the average weekly salary for the state comes out to $1,013.
• Nearly four in ten Americans lack the funds to cover a $400 emergency expense.

The bottom line

Some emergency loans are healthier for your finances than others. Even when you need money quickly, take a little bit of time to look at your options so you can get the funds you need without hurting your financial health in the long run.