Strapped for cash when you need it now? You may be wondering if it’s time to take out an emergency loan. Here’s what you need to know to make a great choice.
Everyone’s been there.
You’re getting along fine and then something happens. Maybe it’s a medical bill you didn’t expect or an emergency dental procedure you didn’t see coming.
Maybe it’s a school trip for your kid they didn’t tell you about.
Sometimes, your next payday is just too far away and you haven’t been able to save for it.
That’s where we come in.
At Cigno, we offer emergency loans for people with bad credit, no credit, or who traditional lenders might have overlooked.
Not sure if an emergency loan is for you?
Here’s a quick guide to different types of emergency loan options and when you should take one out.
1. Credit cards
Credit cards are the option of choice for traditional lenders looking to provide quick access to credit.
If you have one already, it’s a simple matter of accessing an ATM and getting your cash.
Even if you don’t have one, applying and getting one is still an extremely fast option to pay your bill.
May cards even come pre-approved, allowing even quicker access to credit.
There are a couple of benefits to this sort of emergency loan access:
- You keep all your financials with one lender,allowing for easier management in the long term
- If you already have a credit card, it’s usually the quickest access to credit available to you
- If you pay your credit card bill on time, it helps build your credit score and is extremely cost effective
However, there are some downsides to this type of credit.
First, if you need cash right now then a credit card application might not be fast enough.
Second, credit cards have notoriously high interest rates – most hover around 14% and charge compound interest each month. This means that even a small bill unpaid can quickly add up.
For example, if you borrowed $100 at 14% and didn’t pay it for three months, your bill would be $148.15.
A significant increase in cost.
When to use credit cards for an emergency loan
If you already have a credit card and have a plan to pay it back relatively quickly, it’s likely the best option for you.
If your bill can wait a few weeks while you get a credit card, then it’s even better – many options come with one-off interest-free periods, meaning that if you can pay it back within the interest-free timeframe, you can essentially borrow for free.
2. Payday Loans
Payday loans are loans that are given out on the assumption they’ll be paid back with the next pay cheque.
Perfect for those times when your next payday is just that little bit too far, payday loans are the fastest and easiest ways to access credit.
Payday loans have a few advantages over other emergency loan options:
- Since they are guaranteed by your next pay cheque, they are usually available to those with bad credit
- Because they are expected to be paid back within the week, fortnight, or month, they are extremely quick to access (often within the same day!)
- You can get them for very small amounts – usually less than $1,000
These benefits mean that if you’re in a corner and don’t know how to get out, they can be a fantastic lifeline.
Since they’re given based on your income and only for the precise amount you need, it’s more difficult to over-borrow and get into trouble.
Finally, while their costs are higher because the lender is assuming more risk (after all, if you don’t use your pay cheque to pay back the loan,the lender is left holding the bag) there are actually government restrictions on what lenders can charge.
For example, at Cigno our lender’s fee only charges 5% interest on the loan amount.
When to use payday loans for an emergency loan
Payday loans are particularly effective for those with poor credit who can’t access other forms of lending like credit cards or home equity loans.
Specially designed for the small amounts of money that can ease the stress of an emergency situation, they are perfect for quick injections of cash, exactly when you need them.
However, they do carry a higher cost in general than other lending options out there – a premium paid because of their higher lending risk and the ease of lending.
In short, you pay a price for convenience.
3. Home equity loans
Like credit cards, home equity loans usually come from traditional lenders. Since they require a house, you’ll likely get it from the same provider as your mortgage.
Home equity loans are loans that are secured against your house. Basically, it’s a promise that if you don’t pay back the money that the lender gives you, they can come in and take your house to ‘make good’ on your loan.
Because there’s less risk to the lender of not getting their loan back, lenders will lend with a lower interest rate and usually lend more, so you can borrow a bigger amount for less.
However, there are a few catches to consider before you get a home equity loan.
For starters, they take longer to process. Since you’re dealing with a traditional lender, they move at traditional lender speed – slowwww.
Second, you need a house to be eligible. Not only that, you need a house that has significant equity in it to be worth something to the bank if you don’t pay back your loan. This means that the amount you’ve paid off from the mortgage from the principal amount you borrowed in the first place is higher than what you’re asking to borrow.
For example, if you borrow $100,000 for a house and pay back $20,000 of that plus interest, then you can probably get a home equity loan for up to $20,000.
Finally, you need to comfortable with the fact that if you don’t pay back your loan, you will likely lose your house, so the risk is significant for you the borrower.
When to use a home equity loan for an emergency loan
For a ‘need cash now’ type emergency, a home equity loan might not be a viable option because of the slow processing time.
However, for those with the option and the time, they usually offer the best rates for a quick injection of cash.
One popular financial strategy is to take out a short-term, fast loan for the now and a home equity loan for the future. This allows you to cash to use for your emergency, and the pay that loan back with your home equity loan and enjoy a better rate while you find your feet financially in the weeks and months following an emergency.
It’s extremely common to need an infusion of cash due to an emergency. Whether it’s a medical emergency, an unexpected bill, or just a bill that’s a little higher than you thought, it can happen to anyone.
Fortunately, being a little short one week isn’t the end of the world. Credit cards, payday loans, or home equity are all good ways to get the emergency cash you need when you need it.
Are you looking for a quick cash injection? Apply now for up to $500!