What is an emergency loan and where to avail it?

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The types of emergency loans and the factors to consider while selecting a loan.

The events of the past two years have exhibited how unpredictable life is, with the pandemic disrupting the livelihood of many people and resulting in job losses and salary cuts. Similarly, there are other events in life that arrive unexpectedly and make us run around due to the shortage of finances. It could be a medical emergency, urgent home repair, vehicle repair after an accident, funeral expenses, or any other event requiring money.

If we have not saved for an emergency fund we look around for a personal loan to tide over the crisis situation. It could be a loan from our family or friends or even from a lender with or without collateral. But the best idea is to weigh all the options and evaluate the terms and conditions before signing any loan application. The individual should understand his financial needs before opting for any of these loans and should consider the rate of interest, fee charges, terms of payment, and the speed with which it is approved.

The emergency loans come for a short term and are offered to people with less than perfect credit scores. This could mean that the emergency loan could have high-interest rates and fees. The types of emergency loans are as follows-

Personal loans-

A personal loan is an unsecured loan that considers your credit score and history to determine how much loan you can get and at what interest rate.  It can be paid back in monthly installments over a period of time and can be used for any emergency. Some lenders provide secured personal loans against collateral like real estate, cars, or even investments.

Payday loan-

The payday loans are unsecured short-term cash loans, small in amount, and are borrowed by people till they receive their next month’s salary. These loans are lent at very high-interest rates (between 30-50%). Credit cards that charge (24-36% per annum for rollover) appear cheaper.

These loans have to be repaid between 7 to 60 days and are helpful for people who have no money left at the end of the month. People take them for their convenience in case of emergency as they can be got with fast approval and disbursement; with minimum documentation and formalities and don’t require collateral or credit check. The disadvantage of this loan is that the interest rate is very high and if a person is not able to repay the amount it can land him in huge penalties and additional charges and finally into a debt trap.

Credit card cash advance-

If you have a credit card you can apply for a loan against the credit card. The credit card is used for making purchases at places that accept credit cards but is of not much help when you require cash. In this case, you can apply for a cash advance from a credit card. But you should be aware that the interest rate and other charges on the credit card are higher. The fees include cash advance charges and transaction and processing fees. There is no grace period and interest starts accruing as soon as you take the money out.

Loan against vehicle-

If you have a car you can use the car’s title to get a short-term loan. When you apply for a loan against a vehicle the lender will send an expert to determine the market value of the car and most lenders offer 70-85% of the value of the car. Once the loan is approved the lender will own your car and you can’t sell it till the loan is repaid. You can get the time of up to two years for repayment and if you decide to prepay the loan amount you will be charged a penalty; if you are not able to pay it back your car will be seized.

Loan against FDs-

When you have a cash crunch you can consider getting a loan against your fixed deposit. And the banks keep the FD as collateral. This is a secured loan so the interest charges are less(it could be 0.5-2% above the FD rate). The loan amount can be up to 90-95% of the deposit amount and in case you are not able to repay the bank can recover it from the FD amount.

Loan against gold-

A gold loan is a secured loan and is taken by a borrower by pledging their gold items. The loan amount is normally 80% on the market value and quality of gold.

The lender assesses the gold items and verifies the documents when you go to him for a loan. The interest rate for gold varies among lenders and can be from 7-17%. A processing fee of 1-3% of the loan amount is charged by the lenders.

Loans against shares, mutual funds, insurance, and bonds-

You can avail of a loan against shares, mutual funds, insurance, and bond by pledging them and not selling them in haste. This way you get a loan when you need it the most and as a shareholder, you can keep receiving the dividends and bonuses. The amount you will be able to avail would normally be 80%- 85% of the value of the securities.

Where you can get an emergency loan?

You can get an emergency loan from your payday lender or even from a credit card issuer but it is better to get an unsecured loan from your bank or online lender.

Visit your traditional bank and try for a loan there. The bank will have a requirement of credit score or income details. Check how fast you can get the loan and at what time the money will be in your account.

The online lenders also offer emergency loans and you need not be a member or current account holder. You must ensure that it’s a reputed online lender with a good offering. 

Things to consider while selecting an emergency loan-

Interest rates-

Interest rates are an important factor in any loan and compare the rates of various banks. If you have a good credit score you can get a loan at lower interest rates.

Fees-

Compare what fees the lenders charge. Read the fine print. It would also include the origination fee and late payment fee.

Time taken to receive money-

Since you require the funds urgently the time of one or two days will be fine. But some lenders even take a week to deposit money so try to avoid them.

Repayment terms-

Repayment of emergency loans varies according to each lender. Check if you can repay the loan sooner if it is convenient for you.

The thing you can do in case of emergency is to have an identification document and proof of income and employment-ready, compare the terms and conditions of the lenders and apply for the emergency loan. Many lenders take quick approval decisions and give approval the same day you apply for the loan.

Emergencies arrive without a warning and a person should be aware of the loan he can get during such situations. The terms from various lenders and financial institutions can be compared to arrive at the best possible rate and the time period for repaying back the emergency loan can also be considered.

dbssethi

After working for many years in the Marine industry it was becoming clear that I was filled with an entrepreneurial spirit and wanted to pursue my own passions and dreams.
Over the years of studying and dealing with my own finances, I wanted to share my experiences with other people. Personal finance is something that excites me the most and I am very passionate about it.
Entering the stock markets during the Harshad Mehta heydays and then the collapse of the market led me to search for answers and I read a number of investment books and with time was able to identify multibagger stocks. Along with my job I was also working as an insurance and mutual fund advisor but managing both was proving difficult. As I had saved sufficient money I thought of taking early retirement and here I am to talk about my financial experiences.

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