Are you facing an emergency but lacking the cash to cover it — even with an emergency fund?
Well, you’re not alone. According to a Federal Reserve Board report, 44 percent of Americans don’t have enough cash to cover a $400 emergency expense without having to sell something or borrow.
“You can’t always control when you have a major expense,” stated Alia Dudum, consumer debt expert for LendingClub. But when it comes to figuring out how to pay for these expenses, Dudum said, “You can make good decisions.”
Before you charge it all to a credit card, Dudum advised, “[Consider low-interest] personal loans as a responsible way to pay for something expensive.”
How to decide if low-interest personal loans should be used for emergencies
With competitive interest rates and a range of repayment options, a personal loan can be a more affordable way to pay for an emergency.
Here are four questions you should ask to decide if low-interest personal loans are your best option when you’re in the middle of an emergency.
1. Can I pay for this emergency without borrowing money?
When you first encounter an emergency, you should take stock of your financial situation and look for cash that’s available or can be freed up to pay for it.
Here are a few steps you can take.
Tap your emergency fund
“Plan for eventual emergency expenses by setting aside money in a ‘life events’ fund each month,” advised James M. Matthews, a certified financial planner and managing director with financial advising firm Blueprint.
According to Matthews, part of the wisdom of having an emergency fund is “not being afraid to use it when an emergency happens.”
Redirect your cash flow where you can
Critically re-examine your budget and look for anything you can cancel, skip, or do without at least temporarily to help pay for an emergency. It can be an effective way to manage relatively small emergency costs.
Ask about a repayment plan
If the emergency is a bill or major purchase, see if the payee would be willing to accept payment in installments.
“Repayment plans can be a good option when they allow you to avoid interest and spread the payments over a period of time at no additional cost,” Matthews said.
If none of the above options will work for you, turning to credit and low-interest personal loans can be helpful when “you don’t have enough emergency fund reserves to cover the expense,” Matthews said.
2. Can I qualify for low-interest personal loans?
If you want to find a good deal on low-interest personal loans, you need to check your credit score and see where you stand.
“Generally speaking, the better your credit profile, the lower the rate of interest you’ll be charged in exchange for borrowing,” Dudum said.
Lenders that offer low-interest personal loans also consider other financial factors, such as:
- Your debt-to-income ratio (DTI). This ratio measures how much of your budget is currently going toward repaying debt. “Lenders see this as an indicator of your ability to comfortably take on and pay off more debt,” Dudum said.
- Your credit utilization ratio. This ratio measures how high your balances are compared to your limits on revolving credit, such as credit cards. “If it’s higher than about 30 percent, many financial companies see this as an indicator that you might not be as responsible as you could be,” Dudum pointed out.
- Whether you always pay your loans and bills on time. Lenders usually look at your payment “track record,” Dudum said. They’ll look for a clean history of repayment with no recent late payments or delinquencies.
- Whether you have a steady income. “If the emergency is related to job loss or other loss of income, qualifying for a loan may prove difficult, if not impossible,” Matthews pointed out. You might have to find another way to borrow the emergency funds you need.
3. Are low-interest personal loans your best borrowing option?
You’ll want to find the most cost-effective option to borrow for an emergency. Here’s how you can determine whether low-interest personal loans fit the bill.
Compare borrowing costs
You’ll want to compare the interest rates and fees on different borrowing options, including credit cards, lines of credit, and low-interest personal loans.
Low-interest personal loans often beat out credit card APRs. Recent data from the Federal Reserve Bank puts the average personal loan rate at 10.57% for a two-year personal loan. That’s well below the average 14.99% on credit card accounts on which lenders assess interest.
Consider ease of borrowing
However, it’s possible your personal loan rates wouldn’t beat your credit card rates if you recently damaged your credit. Or as Matthews mentioned, an emergency that impacted your income might make it hard to apply for a personal loan.
In those cases, a credit card or personal line of credit you already have could be an easier way to borrow.
Lastly, you might want to consider whether this emergency will incur one-time costs or ongoing expenses. A roof repair can be paid for at once with a personal loan, for instance. But paying for ongoing medical costs might call for the flexibility of revolving credit, such as a credit card or personal line of credit, which you can borrow from as needed.
Plus, you could consolidate credit card debt into a personal loan at a later date and get a second chance at lower personal loan rates.
4. Will my monthly payments be affordable?
Even for an emergency, you don’t want to get into debt you can’t afford to repay.
That’s why, according to Matthews, a key factor to weigh when deciding whether to pay for an emergency with a personal loan is your “ability to afford the loan payment without impacting your other monthly expenses.”
Before you start shopping for a personal loan, look at what repaying this debt could look like. Our personal loan calculator can help you quickly see how different loan amounts, interest rates, and loan lengths could affect your monthly payments and total borrowing costs.
Make sure borrowing what you need comes with a realistic repayment that won’t overburden you for years to come.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|