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An emergency loan can provide much-needed cash during a difficult financial situation. But if you have bad credit, you may be wondering if you can qualify for such a loan.
The bottom line is yes, you can get an emergency loan with bad credit—but your options may be limited. With less-than-ideal credit scores, you can generally expect to pay relatively high interest rates, so it's important to shop around to try to limit your costs.
Emergency Loan Options for Bad Credit
If you've had some emergency expenses pop up and you need cash fast, there are a lot of lenders who are willing to provide it.
However, getting a loan with bad credit can be a little more challenging because of the risks involved for lenders. That's because data shows that people who have bad credit scores are more likely to default than people with good credit.
To help you start your search, here are some emergency loan options for bad credit.
Some lenders run all of their operations online, and since they're avoiding the overhead costs associated with having physical branches, they're often able to provide more access to bad-credit loans than traditional banks.
That said, repayment terms and interest rates can vary wildly with online lenders and some charge annual percentage rates (APRs) in the triple digits on their short-term loans. To help you avoid these exorbitant fees, Experian CreditMatch™ can show you rate offers from multiple lenders that you may be qualified for based on your credit score.
Credit unions are nonprofit organizations owned by their members. So instead of maximizing profits to benefit third-party shareholders, credit unions use their revenue to provide lower interest rates and fees to their members.
The payday-alternative loan is one result of this arrangement. These loans can range in amount from $200 to $1,000, and in repayment term from one month to six months. Because of federal regulations, the maximum interest rate credit unions can charge is 28%, which can be much lower than alternatives.
The caveat is that not all credit unions offer payday-alternative loans, and you need to have belonged to a credit union that offers them for at least one month before you can apply. In other words, a credit union is likely not an option for emergency expenses unless you're already a member of one that provides this type of loan. If you are, it can save you a lot of money.
A lending circle may be an option if there's a nonprofit or community organization in your area that provides them.
This type of lending works by bringing together a group of six to 12 people who take turns receiving loans from each other and paying them back monthly. Interest rates typically are low or even zero.
Depending on the organization, your payments may also be reported to the national credit reporting agencies (Experian, TransUnion and Equifax), which can help you build your credit like you would with a traditional loan.
The only drawback is that it can take time to get involved with a lending circle, and there's no guarantee you'll be the first one to receive loan funds, which doesn't do much for your immediate needs. But if you time it right, it could be the cheapest option available.
Credit Card Cash Advance
A credit card cash advance may be an option if you have a card that allows it, but it shouldn't be the first thing you consider. To request a cash advance, take your card to an ATM or bank branch, decide how much you need and provide your PIN.
Cash advances can be expensive. Unlike regular purchases you make with your card, there's no grace period, so interest starts accruing immediately—and cash advance APRs are sometimes much higher than purchase APRs. Also, cash advances typically come with a fee that can be 5% or more of the advance amount.
Another thing to remember: Your cash advance limit could be much lower than your card's spending limit. Check your online account or latest statement, or call the number on the back of your card to find out what your limit is.
Finally, there's no set repayment term on a credit card, so if you're not careful, you could end up with high interest debt for years to come. But if your only alternative is triple-digit APRs on a personal loan or payday loan, a credit card cash advance may still be a better fit.
In general, it's best to avoid payday loans in a financial emergency. This is because payday loans charge staggering interest rates—you can expect an APR in the neighborhood of 400% or higher—and they typically require full payment within just a couple of weeks.
In most cases, you'll have other options that are much cheaper and have more favorable repayment terms.
How to Plan for Emergencies
Taking on debt every time an emergency expense pops up isn't ideal, but sometimes it's necessary. After you've found the best option for your situation, make a plan to pay back the money as quickly as possible. Then take some time to plan for future emergencies.
Of course, it's almost impossible to predict when such a thing will happen again, so the sooner you can start the process, the better.
The best way to plan for future unexpected expenses is to set up an emergency fund. You can do this with a regular savings account, and some banks may even allow you to open a separate account so it's not mixed with other cash you have set aside for the future.
Once you have the account, make a goal to set aside a certain amount each month. Depending on your budget, that may not be a lot, but even a little savings can make a big difference when you need it. And if there is room in your budget to cut back on some discretionary spending, it may be worth doing so at least temporarily while you establish a safety net.
You can use these funds if you lose your job or run into medical bills or repairs for your car or home.
Building Your Credit Can Also Help You Prepare
As you work on establishing your emergency fund, also take some time to find out what you need to do to build your credit history. Start by checking your credit score and your credit report to find out where you stand and which areas need to be addressed.
For example, if you're behind on some accounts, get caught up as quickly as possible and pay on time going forward. If your credit card balances are high, work on paying them down. And if you've applied for a lot of credit recently, try to take a break.
As you take these and other steps to improve your credit, you'll have more options in the future if you ever need to borrow money for an emergency—or anything else, for that matter.