Should You Use Low-Interest Personal Loans for Emergencies?

low-interest personal loans

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!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (
  2. Personal LoansFixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 4.98% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 21, 2017 and are subject to change without notice. Not all rates and amounts available in all states. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 4.98% APR assumes current 1-month LIBOR rate of 1.34% plus 3.89% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
4.98% - 14.24%1$5,000 - $100,000
Check rate nowon SLH's secure site
8.00% - 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.