How to choose the right emergency loan for you

If your financial health is not quite a good as it could be, you may likely have struggled to put money aside for any potential emergencies. This means that when the worst happens your options are fairly limited and you have the need to explore emergency loans. Emergencies such as a broken-down car that is needed for work, a faulty boiler leaving you without heating or hot water, or a damaged laptop that is vital to your work are all on the expensive side!

The emergency loans that are right for you will depend upon your circumstances. Running through the options that are available to you in your time of need may only add to what is already a stressful situation. We’re here to explore some of the choices that you’ll face so that, should the time ever come, you’ll be fully informed and know exactly which emergency loans are right for you.

What are emergency loans?

Emergency loans can come in several guises. These can include personal loans, credit cards, and payday loans. The option that you veer towards will depend on how much you need to borrow, for how long, and just how quickly you can get the funds into your account.

Of course, emergency loans are for emergencies. This means that speed is one of the most important factors to consider. Generally speaking, to be classed as an emergency loan the funds would need to be with you within 2 days. If you are not looking for funds quite this quickly, it could be worth exploring other options that are out there.

A brief look at APR

When looking at emergency loans, and indeed any type of borrowing, you are going to come across the term APR. Before we look at emergency loans themselves, we just wanted to take a moment to explain what APR is and the impact that it has on your repayments.

APR stands for annual percentage rate. It is the complete cost of your borrowing and includes everything you will pay: the loan amount, the interest, and any fees. Often you will see APR advertised as being representative. This is to give you an idea of what the APR could be. The exact APR that you receive will depend upon your personal circumstances.

A basic example of how APR works looks like this:

  • You borrow £10,000
  • The APR is 5.5%
  • Your repayments are £301 over 36 months
  • The total amount payable is £10,848.60
  • £10,000 is the original loan amount
  • The £848 is made up of the interest and fees

Often when looking at short term borrowing, or if your credit score requires some work, you will see that the APR you are given is on the high side. With credit cards alone, you can see the APR range from 5% up to 30% depending on your circumstances. With that covered, let’s start to take a look at the options that exist.

Personal loans

As emergency loans go, being able to use a personal loan can be advantageous. Why? If you have your credit score in the right place, you will find that the APR is much more attractive than when you look at the likes of credit cards or payday loans. The other great thing about personal loans is that you can use them for pretty much anything that you want to. Whether your car has broken down, your washing machine is on the blink, or you are between jobs, a personal loan could be the answer for you. You will also find that you can borrow a larger amount with a personal loan when compared to other options.

The main potential issue with personal loans is time. There are lenders who offer quick funding, but by the time you have worked through the application process, been approved, and received the funds, several days could have gone by. If you are able to obtain a loan through your own bank, this can often be quicker as there is already a relationship in place.

Something else to be aware of with personal loans is the level of interest. You can find loans that offer interest as low as single figures. On the other hand, you will also find lenders with interests rates of 100% or more. The interest rate that you will be eligible for will all depend on your creditworthiness.

Credit cards

Credit cards are another option when you are exploring emergency loans. What makes credit cards an attractive option is that they are convenient and you also have a degree of control over the monthly payments that need to be made. That being said, we would advise against falling into the trap of only making the minimum monthly payment: this can see you paying back so much more and it will potentially take years to clear a balance.

Using a credit card has a similar issue to personal loans in that the application process is not always fast. If you already have a credit card then providing that you are not already at your limit it makes sense to use this. If you need to apply for a new card, it is unlikely that you will have access to funds fast enough to deal with your emergency.

When you compare the APR of credit cards to that of personal loans, you will see that it tends to be much higher. Even though we have said credit cards allow you to spread your repayments at a level that suits you, the best option is to clear the balance within a month so that you avoid any interest at all.

Payday loans

We wanted to allow you to see all of the options that exist when it comes to emergency loans, and so that means including payday loans. Although payday loans are often quick and can see funds into your account when you need them, they do have several drawbacks that you need to be aware of before going down this root. In fact, we would go as far as saying that payday loans are the worst-case scenario and should be avoided if at all possible.

The first thing that you will likely find is that the APR is extremely high. Payday loan companies argue against this and say that given their lending is only short term, using APR is not a true representation of what loans cost. They prefer to advertise a daily rate. The truth is that these daily rates look no more attractive!

Payday loans also lack any flexibility. Generally, repayment is due within 30 days although some companies will now allow up to 3 months. Given the interest rates, often 30 days isn’t time for you to deal with your emergency and recover yourself so that you are comfortable paying. That is what sees people taking out payday loan after payday loan as they get trapped in a cycle.

Making the right decision

When we are faced with emergencies we are already under a great deal of stress. Our focus is usually on resolving the situation as quickly as possible. The problem with this is that it can see people make knee-jerk reactions. These often turn into decisions that are filled with regret down the line.

As the ads suggest, it may be easy to dive in and secure a payday loan. The funds will be with you in an instant in some cases and you can face your emergency. What follows is not always quite so simple.

The main thing here is for people to take a breathe and step back. There is a need to look at all of the options and know what needs to be avoided. High-interest rates and restrictive terms and conditions can see people spiralling into debt. By taking your time and exploring safer options, you can deal with your situation, repay your loan, and maintain (or even improve) your credit score.

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