Emergency Loans When Your Credit Score Is Low

Unexpected emergencies can happen overnight. Whether it is a car breakdown, an unexpected medical bill, the furnace suddenly stops working, or an unanticipated job loss, one day you are financially stable and the next day you may be worried sick about paying your bills on time. Before you know it, your funds have been depleted, and many individuals will seek bad credit loan financing as a way to get back on their feet.

You may have had some issues with money, but having a bad credit rating does not necessarily mean you’ve made poor financial decisions. Typically, it indicates you were dealt a bad hand financially and/or perhaps missed a payment or two in the past. The problem is that if you need immediate assistance, bad credit can make it very difficult to obtain financing options.

We’ll go over what lenders commonly evaluate when making a decision, and how emergency lending is structured, along with things to keep in mind prior to accepting any lender’s proposal.

Why an Emergency Loan May be More Difficult with Lower Credit Scores

Credit history is used by many lenders in order to assess the level of risk when extending credit to you. In addition to this, a low credit score may indicate to lenders that you have made late payments, have accounts in collection, or have high balances; therefore, some lenders may decline your application, request additional documentation, or offer you higher costs.

However, there is more to the story. Knowing what else lenders look at – including your current income, bank account history, and if your monthly expenses (budget) are large enough to cover the cost of the loan you’re applying for can be beneficial to understanding why a lender is denying you or charging you a higher interest rate.

How Is “Bad Credit” Defined?

A credit score is generally made up of three numbers (typically between 300 and 850). The most commonly used credit-scoring model is the FICO score. Many personal finance websites consider anything less than about 580 to be a poor credit score; however, different lenders have varying standards for what they consider a good credit score, as many use alternative credit-scoring models in addition to the FICO model.

Poor credit can be caused by several factors, including late payments, excessive usage of credit cards, collections, or a very short time frame to establish your credit history.

How People Get Cash Fast in an Emergency

People who need money as quickly as possible often look for a few basic things: easy, quick applications; fast answers; and no waiting period. However, “fast” never means skipping important details before accepting an offer of funding.

Take a little time to review the interest rate, fee structure, and repayment terms, because a loan that may be helping you today could be causing financial problems tomorrow if it does not meet your budget requirements.

What Lenders Are Looking For

Even though there are bad credit loans available, many lenders will still want some proof that you have a way to repay them. Typically, lenders will require documentation of your identity, income or benefits, an open bank account, and at least a few of your other basic contact details. When a lender requests additional documentation, that is typical of their anti-fraud checks and income verification.

Common Emergency Loan Types and What to Watch Out For

Emergency Loans may be either unsecured, which means you do not put up any type of collateral (such as a car or house) for the loan, or they may be secured, which utilizes an item you already possess in exchange for the loan.

It may seem safer to opt for an unsecured option since there will be no potential loss of an asset should you miss a payment; however, secured options carry a greater risk of losing an asset if you miss a payment.

A Word on Title Loans and Pawn Style Loans

Title loans and pawn loans have some big drawbacks. Title loans use your vehicle title as collateral. If you cannot repay the loan, you may be forced to surrender your vehicle. For some families, this would cause a real personal crisis, in addition to a major financial loss.

A pawn loan works the same way; you give them a valuable object (jewelry, tools, electronics) to use as collateral for a loan, but when you fail to pay back the loan and fees, you risk losing those items permanently.

In general, most consumers would find it reasonable to explore other, less risky alternatives before pursuing either of these lending options.

The Big Risks to Avoid in Emergency Borrowing

Loans may be expensive simply as a result of how they are structured; two problems often occur:

Short Repayment Windows

If you borrow money for a short time frame, your payments may be too high to handle. For example, a $500 loan to be paid back over a 14-day term (two weeks) may require a $575 payment. Although the math appears reasonable, this may be unmanageable, especially if you are due to pay rent during that same week.

Example only: loan amounts, fees, APR, and repayment dates vary by lender and state, so always review your offer details before you accept.

Extensions and Rollovers to Pay off Prior Debts

Sometimes extensions are allowed on a loan, adding additional fees. For example, a $300 loan with a $50 extension fee could cost you $350 after just one rollover, then $400 after 2 rollovers. The cost of a loan can increase rapidly if a borrower continues to extend or take on new loans to pay off an existing loan.

If a lender makes money every time a borrower extends (or takes another loan to pay off their previous one), it is a serious warning sign. A good loan should clearly state its repayment terms and include a reasonable repayment schedule at the outset – not one designed to keep borrowers trapped in a cycle of repeated borrowing.

When a Bad Credit Loan Can Be a Smart Emergency Tool

If your emergency is urgent, the loan payment will fit in your budget, and you have a realistic plan for repayment, then a bad credit loan may be a viable solution for you.

These loans, however, work best as a single emergency fix and not as an ongoing form of financing. For example, if you find that you are having to borrow money on a monthly basis to simply meet your basic monthly living expenses (rent, utility bills, grocery bills) then this could be an indicator of several things; such as, your current income is not meeting your monthly expenses, you may need to reduce your monthly spending, or you may be missing out on community resources/assistance programs.

Emergency loans can provide real help when utilized responsibly. However, long-term financial stability can be achieved by addressing the root cause of the problem rather than trying to finance your way through every month.