Emergency Loan: Which One is Right For Me?

Unexpected expenses crop up all the time. Your child needs to go to the emergency room. Your dog needs surgery. Or you realize that you can no longer avoid your leaky roof. Whatever the reason, this type of emergency expense needs to be paid for. If you don’t have the money in savings, getting an emergency loan might be just the thing to tide you over.

Emergency loans, also known as payday loans or short-term loans, can help during times of crisis. And while they do have fees and interest rates associated with them, they may be your best bet for covering unexpected expenses when they occur. What types of emergency loans are out there? Which one is right for you?

Short-Term Loans

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The Wall Street Journal reported that payday lenders are courting bank customers. The reason? Many bank customers who feel undervalued at banks find a measure of respect at payday lending offices, according to the WSJ.

For the borrower, the process for obtaining a payday loan is far less arduous than applying for a line of credit. The borrower is instructed by the payday lender to write a check dated two weeks ahead for the amount he or she wants to borrow. Once the line of credit is due, the lender cashes the check. If you know you’ll have money after payday to cover the line of credit, this can be an easy way to get cash fast.

Borrowers should do their homework about the interest rates and the availability of payday loans. The Consumer Federation of America (CFA) maintains a list of which states allow payday lending and which prohibit or have restrictions on payday loans. The state-specific information from the CFA covers maximum loan amount, maximum line of credit term, finance charges, APR, and collection information.

Payday loans can be obtained in amounts from $100 to $1000. Borrowers should check state requirements for loan amounts.

Lines of Credit

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New to the finance world are banks that offer lines of credit similar to payday loans. These lines of credit are considered to be “short-term advances of relatively small amounts,” according to The New York Times  Your Money. Advances are generally up to $500 with a fee charged by the bank of approximately $10 per $100 borrowed, according to the The New York Times.

The bank deducts the amount of the line of credit plus associated fees from the borrower’s next scheduled direct deposit. What are these funds to be used for? The New York Times states that they are a “short-term solution to an emergency cash crunch,” not a “long-term way of managing your money.” Keep in mind: This isn’t a line of credit for a new pair of shoes. Because of the cost to borrow the money it should be reserved for emergencies, like medical expenses, replacing broken appliances, or other unexpected events.

New Installment Loans

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A new kind of loan has emerged: installment loans. These loans, which are paid back in regular installments over a period of time — from four to 15 months — can provide a convenient way to pay emergency bills, even if you have bad credit. Rates for installment loans may be lower than what they are for payday loans, and if you pay off your first loan on time, you may be eligible for lower rates for subsequent loans.

Installment loans are best suited for people who may not qualify for a credit card. The average credit score for some of these borrowers is 500.

Beware of Loan Scams

No matter what loan you go with for your emergency situation, be aware of how they work. There are reports of scams where alleged bill collectors call to threaten you to repay the loan over the phone.

If you get a call you’re unsure about, don’t give out any account information, your social security number, or credit card information. Ask that the caller send you information in writing on the debt. You also can call your original lender to make sure the call is legitimate. If not, report the caller to the Better Business Bureau.

Peace of Mind

Emergencies can be stressful, and adding the financial burden of trying to pay for it only makes the situation worse. Having options like these to take out a loan to help pay for your emergency can at least take part of the money out of the equation. Just be sure to pay the loan off as soon as possible to avoid extra fees and higher interest rates.