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- How do emergency loans work?
- Can you get emergency loans for bad credit?
- How much emergency savings should I have?
- Emergency credit from banks and regular financial institutions
- Emergency credit from other authorities
- Money to use in an emergency that you don’t have to repay
- Where to go if you need emergency help or are in debt
Whether it’s a broken boiler or an emergency trip to the vet, some expenses can take you by surprise.
If you don’t have savings that you can access easily, unexpected costs can be worrying, and an emergency loan may be an option that you’re considering.
Sometimes, payday loans and other types of short-term credit can be sold as ‘emergency loans’ by some lenders. This is because they can be relatively quick to apply for and to be paid into your account, which is useful in an emergency.
However, these types of loans are expensive. If you rely on them to cover emergency expenses and find yourself short on funds because of the subsequent repayments, you risk getting trapped in a cycle of debt.
Other options for an emergency loan include credit union loans and government Budgeting Loans. You can also look into applying for support that you don’t have to pay back, such as grants and benefits.
How do emergency loans work?
An emergency loan is a loan you take out to cover an unexpected expense. But there isn’t a standard type of emergency loan, and they can come in different forms.
For example, because of a quick application process, many short-term and payday loan providers advertise ‘emergency’ loans, but they won’t usually be a separate product. If a lender claims to offer loans tailored towards helping people out in an emergency, you may be looking at very expensive short-term or payday loans.
This means that emergency loans can be a type of high-cost short-term credit, which the regulator, the Financial Conduct Authority (FCA), defines as unsecured loans with an APR of 100% or more and repaid within 12 months or less. You should think very carefully before taking out one of these loans and explore alternatives first.
The type of emergency loan that you use will determine how you pay it back. For example, you might repay a payday loan in one instalment after you get paid next, whereas you can repay other short-term loans over several instalments.
» MORE What is a payday loan?
What can you use emergency loans for?
Because emergency loans aren’t a specific type of product, they don’t have to be used for a specific purpose. However, common reasons why you might be searching for an emergency loan include urgent repairs and unexpected bills.
Can you get emergency loans for bad credit?
Some payday and short-term loan providers may consider borrowers with bad credit, but they are still required to assess your creditworthiness before offering you a loan. This means that they will often carry out a hard credit check, alongside other affordability assessments.
A lender may be acting irresponsibly if it doesn’t check whether you can afford the loan, or it could even be an unregulated lender. You can check whether a firm is authorised by the FCA using the Financial Services Register.
If you already have a bad credit history and you’re accepted for a payday or short-term loan, you could be charged even higher interest rates compared to those with a better credit history.
It’s unlikely that taking out an expensive payday or short-term loan to cover unforeseen expenses will be right for people who have a history of struggling to make repayments. A history of missing payments can make the loan more costly, and if you then take out further credit to make ends meet, you could find yourself trapped in a debt cycle.
These types of loans can also impact your ability to get credit in the future, as lenders may not look favourably on a credit history that includes high-cost short-term credit.
While urgent costs can be worrying, there are other places you can turn to for help, including your local council, credit unions and money advice charities.
How much emergency savings should I have?
Rather than taking out credit when faced with an emergency, dipping into an emergency savings fund is often the best option.
If you want to build up an emergency fund, a useful aim is to save around three months of essential outgoings, which would be able to sustain you in a situation like a job loss. However, while this is a great goal to have, any amount saved will be useful in an emergency.
If you already have debt that you need to repay, you might want to work out whether it’s best to focus on clearing that first – especially if the interest rates are high. But if you’re comfortable with the interest you’re paying and don’t have any difficulty meeting your repayments, you could save alongside clearing your debts.
Emergency credit from banks and regular financial institutions
Overdraft
You can borrow money from your bank using an overdraft, which is when you take out more money than you have available in your current account. You should only use an overdraft for emergency or short-term borrowing.
It’s important to arrange your overdraft with your bank, which will give you an overdraft limit. Interest rates can range from between 19% to 40% or more.
While an overdraft can be useful in an emergency, if you’re always in your overdraft it may signal a problem with your budgeting and can end up costing you a lot of money.
If you use your overdraft for an emergency, be sure to look for ways to ‘clear’ that debt so you don’t enter your overdraft again the following month. This could be by cutting back spending or using any available savings.
Personal loans
A standard personal loan may help in an emergency. Some lenders can approve and pay out your loan in a matter of hours, and many let you check your eligibility without affecting your credit file.
An advantage of using a personal loan rather than a short-term loan in an emergency is that personal loans usually charge lower interest rates. But they can be harder to get, with stricter eligibility requirements, and the lowest interest rates will be easier to get for those with better credit scores.
The minimum loan size available on personal loans is generally higher than short-term loans. When looking for credit, you mustn’t apply for more than you need.
The minimum loan term available is usually 12 months. While longer terms mean that your monthly repayments will be lower, you’ll end up paying more interest. So, despite lower interest rates, you should double check that a personal loan won’t cost you more overall versus a short-term loan.
Many lender websites have loan calculators that show you how much your monthly repayments will be and the overall cost of your loan.
You can also use our loan calculator to understand your likely repayments at different interest rates.
» MORE: How to get a loan
Credit card
Credit cards usually come with lower interest rates than payday or short-term loans, but it’s important to manage them well to ensure that costly debt doesn’t build up. You should only spend money on a credit card that you can afford to pay back.
You could look into a 0% credit card, which gives an introductory interest-free period. As long as you clear your balance by the end of that period, you won’t have interest to pay. This makes it possible to spread paying back an emergency cost over the introductory period without paying interest.
But missed credit card repayments harm your credit file and can mean that an introductory 0% period is removed. And longer interest-free periods are usually reserved for those with better credit scores – people with lower credit scores may get a shorter interest-free period or a lower credit limit.
A credit card that charges interest in the normal way could still be a useful option in an emergency, but it will be costly if you only make the minimum payments and don’t clear the balance in full each month.
A drawback when applying for a new credit card in an emergency is that it could take up to 10 working days for it to arrive after your application is accepted.
» MORE Should I get a credit card?
Emergency credit from other authorities
Credit union loans
Credit unions are community organisations whose members usually share a ‘common bond’, for example, they live in the same location or work in the same profession.
While you need to be a member to apply for a loan from a credit union, your loan application may also be considered at the same time as an application for membership, which means a credit union could still help if you need money quickly.
You can often borrow relatively small loan amounts, helping you apply for no more than you need, and they are usually a cheaper alternative to high-cost short-term credit.
Budgeting Loans and Budgeting Advances
A Budgeting Loan or Budgeting Advance are interest-free loans from the government, available if you’re on certain benefits and need help paying for things like furniture and emergency household costs. The amount you can borrow depends on whether you’re single, part of a couple or have children. The lowest amount you can borrow is £100.
You could be eligible for a Budgeting Loan if you aren’t currently receiving Universal Credit and have been getting at least one of the following benefits for more than six months:
- Income Support
- income-based Jobseeker’s Allowance
- income-related Employment and Support Allowance
- Pension Credit
If you’re receiving Universal Credit, you may be eligible for a Budgeting Advance instead.
Loans from your local council
Local councils may be able to help with essential costs if you’re on a low income, including emergency expenses for food or bills. This may be in the form of a loan, grant or voucher. Different authorities run different schemes so eligibility criteria can vary.
You can visit your local council’s website to look for information about the schemes it runs. Searching for ‘welfare assistance’ is a good place to start. Otherwise, you can speak to the council by phone, email or go to its office in person.
Money to use in an emergency that you don’t have to repay
Grants
Grants can come in the form of money, products or services that you don’t have to pay back. They’re usually given by local authorities, charities and similar organisations to those who need support the most.
You could speak to your local council, which may run an emergency grant scheme. Otherwise, the debt advice charity StepChange recommends that you visit Turn2us, a charity which allows you to search for grants and other support you may be entitled to.
Benefits
Are you getting all the benefits that you’re eligible for? If you’re on Universal Credit, you may be able to get further support for things like rent, childcare, council tax and medical costs.
Debt advice charities like StepChange, National Debtline and Citizens Advice can help you work out what support you’re entitled to. You can also use the benefits calculator available at Turn2us.
Energy bill support funds
If you’re finding it difficult to pay for your energy, you may be eligible for extra support. Some suppliers run their own support funds and there are grants and schemes run by the government and local councils.
It may be useful to speak to a debt advice charity like StepChange, National Debtline or Citizens Advice if you need emergency money to help pay for energy.
Where to go if you need emergency help or are in debt
As mentioned above, free debt advice charities can help if you need emergency money. It’s probably best to speak to them first before taking out credit, especially if you’re already struggling to meet the repayments on any existing debt. These charities include:
These charities can help with things like budgeting and creating a plan to deal with your debt. They could also help you apply for debt respite schemes such as the ‘Breathing Space’ scheme in England and Wales and the Debt Arrangement scheme in Scotland. There isn’t currently an equivalent scheme in Northern Ireland.
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