Emergency loans explained
Need a loan in a hurry? Emergency loans are one option, especially if you have a poor credit score, but they are also one of the most expensive ways to borrow.
Key takeaways
Annual interest rates can be up to 1500%
Emergency loans often have short repayment periods
Bad credit won’t necessarily rule you out
Emergency funds should be a last resort
If you need cash quickly, you might be thinking about getting an emergency loan. Yet they are expensive and often have short repayment terms. Here’s what you need to be aware of before taking one out.
What is an emergency loan?
Emergency loans, also known as payday loans or crisis loans, are made for short-term borrowing.
If your car breaks down or your boiler packs up, for example, but you don’t have the money to pay for repairs until your next payday, then you might need an emergency loan.
These loans are not suitable for long-term borrowing, as the interest rates can be very high.
What are emergency loans used for?
People typically use emergency loans because they need money quickly on a short term basis.
They are available to those with bad credit and they are sometimes the only option for those with poor credit scores.
But it's important to consider whether you can wait until payday or save up for the funds, as emergency loans can have very high annual interest rates (or APRs) and are expensive.
You should also be confident you can repay a loan of this kind on time or via monthly instalments, as the penalties for late payments can make emergency loans even more costly.
What do I need to consider before taking out an emergency loan?
Emergency loans should be used as a last resort, if you’re thinking of taking one out, look at the following questions first:
Can I afford to pay back the loan on time?
This should be a key priority, especially as emergency loans come with extremely high interest. If affordability is an issue, then you should look into alternatives to an emergency loan.
Is the repayment period too short?
Emergency loans often come with shorter repayment periods, meaning you’ll need to pay the loan back quickly. If this is the case, consider more long term options like a personal loan.
Do I need as much as I think?
Try to minimise the loan amount, so you ensure interest on the principle doesn’t become too much when it comes to repayment.
Can I get a different kind of loan?
Even if your credit rating is low, it can be worth considering longer term options. This includes secured loans, guarantor loans or loans for bad credit.
How much do emergency loans cost?
The amount you pay depends on the lender, and the sum of money borrowed.
As a representative example, if you take out a £500 loan with a representative APR of 1,000% and repayment term of 30 days, you would have to pay back £620. That works out as £24 for every £100 borrowed.
The regulator, the Financial Conduct Authority (FCA) has imposed a cap on the amount regulated emergency loan providers can charge borrowers at £24 per £100 over a 30-day term.
Late payment fees are also restricted to £15 (plus interest). However, emergency loans remain a very expensive way to borrow.
What are the alternatives to emergency loans?
Alternatives to emergency loans can include:
Current account overdrafts
These can be very quick to set up and offer an easy way to increase your short term spending power. But overdraft interest rates can be high – especially if you go over your agreed limit, so they are not suitable for long term borrowing.
Credit cards
If you need emergency cash, using a credit card can give you between 20 and 50 extra days to cover the cost – before you start paying interest charges on the purchase. This is also true of credit-builder cards, which are aimed at people with low credit scores, although these cards do charge higher interest rates.
If you need cash, you can also consider using a credit card to take out a cash advance. Just remember that doing so involves fees and interest charges that kick in straightaway
Representative 29.9% APR Personal loans
Also known as unsecured loans, are almost always a cheaper way of borrowing money than emergency loans. The application process can take longer than with a payday loan, and you’ll usually have to borrow at least £1,000, which may be more than you need. Typically you’ll need at least a fair to good credit rating to be accepted for most deals.
Yet, even if you have a poor credit rating it is worth considering applying for a loan lasting 12 months or more, where the interest rate is likely to be lower. Loans offered through MoneySuperMarket all have a term of 12 months or longer.
Secured loans
These can be easier – although not necessarily quicker – to get approval for than personal loans; remember though that you will lose the asset you put up as security (usually your home) if you default on the loan - so they can be risky.
Government loans
You may be able to get an interest-free loan from the Department of Work and Pensions (DWP), in the form of an advance. If you're eligible and in receipt of Universal Credit, you can request one of these loans during the five-week wait for your benefits to come through. You'll then have two years to pay back the loan, during which time your Universal Credit payments will be reduced.
Universal Credit claimants who have been receiving the benefit for six months or more, and those in receipt of some other benefits, may also be eligible for a budgeting advance. You can use a budgeting advance for buying white goods or other household items, as well as to cover rent in advance or removal costs. A budgeting advance can also be used to fund home security improvements or repairs.
Employer salary advances schemes (ESASs)
If you simply need some extra cash to see you through to your next payday, you may find you can ask for an advance from your employer.
Credit union loans
Credit Unions may offer loans to those with poor credit scores, at cheaper rates than payday lenders.
Buy now, pay later
Many retailers allow you to spread the cost of expensive items, typically across three payments, but there may be high interest rates if you don’t repay on time.
Borrowing from friends or family
If a friend or relative can lend you the money you need to tide you over, this is often the easiest way to avoid taking out an emergency loan. Just remember that you’ll still need to pay it back according to the terms agreed. Otherwise, you risk losing a friend or causing a rift in your family.
Where can I get an emergency loan?
Short-term loans are offered by a range of providers, including online direct lenders, credit unions, and payday loan companies.
But short-term borrowing generally means paying high fees that often lead to an APR of more than 1000%. This is why they should only be used in an emergency.
What documents do I need to get an emergency loan?
Typically, to get an emergency loan you’ll need to prove you’re a UK resident, that you're 18 or over and employed and that you’re earning over a certain threshold per month.
To prove your identity, you can generally use:
Driver’s licence
Passport
Blue Badge for disabled drivers
Armed Forces identity card
To prove your address, you can usually use:
Driver’s licence
Recent utility bill
Bank or building society statement
Tax bill from your local authority
Benefits letter
Tenancy agreement
To enable lenders to check your income you can normally use:
Bank statements
Pay slips
What are the dangers of emergency loans?
Emergency loans should only be used as a last resort and when you are sure you will be able to repay them in full within the term. Reasons for this include:
They come with high interest rates. Annual rates of up to 1500% are not uncommon
Penalty charges can be high, although under FCA rules they can no longer exceed £15 plus interest on the amount borrowed
They can damage your credit score – even when paid off on time. You may find it harder to be accepted for other products, such as a mortgage, if you have taken out emergency loans in the recent past (this is because some more traditional lenders view payday loans as a negative financial choice and indicative of a consumer experiencing financial strain)
All emergency loan providers should be regulated by the FCA. This is important because this means you will be able to complain to the Financial Ombudsman Service if something goes wrong. If an emergency loan provider (or any consumer credit provider) is not regulated by the FCA, they are breaking the law and most likely loan sharks. Borrowing from an FCA-regulated lender means you’ll benefit from the protections they offer
Can I get an emergency loan if I have bad credit?
Having a bad credit score probably won’t rule you out of being accepted for an emergency loan.
This is because payday loans typically come with higher interest rates, so they are more willing to lend to people with less-than-perfect credit scores.
That said, there is no guarantee you will be accepted for an emergency loan. And, just like any other type of loan, you'll have fill out an application form.
To avoid further damaging your credit report with a rejected loan application, first get hold of your free report through credit score and check your status.
An emergency loan should only ever be seen as a short-term fix. If you’re struggling to pay your bills or have ongoing debt problems, try approaching a debt charity, such as StepChange or Citizens Advice, for advice on working out a more affordable payment plan.
Can I get emergency loans without a credit check?
You can’t get an emergency loan without a credit check. If a lender is saying you don’t need a credit check then you need to be cautious.
The Financial Conduct Authority (FCA) has made it a legal requirement for lenders to carry out credit checks.
Lenders suggesting you can borrow without a credit check may not be FCA-regulated and should be avoided.
How quickly can I get the money if I take out an emergency loan?
Emergency loans are designed to get you money as quickly as possible.
That means that if you pass all of the credit checks and agree to the repayment terms of the loan, you can have the money in your account on the day your loan is approved.
What should I do if I am struggling with debt?
It’s important not to ignore debt problems – usually, if you ignore the issue it will only get worse.
If you’re struggling with debt repayments contact your lender. They should offer help in the form of working out an affordable repayment plan, for example by extending the term of a mortgage or loan.
There’s free help and advice available from websites such as MoneyHelper, StepChange and National Debtline. They can help you find the best way to manage your debts depending on your individual circumstances and in some cases they will negotiate with creditors on your behalf.
Other useful guides
If you want to find out more about loans, we have a range of guides for you to read:
MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.
Frequently asked questions
Do I need a bank account to take out an emergency loan?
Most lenders will require you to have a bank account, into which an emergency loan can be deposited. If you don’t have one because of your financial situation, you may want to look into basic bank accounts that are easier to be accepted for.
Can I use my debit card to take out an emergency loan?
Short-term loan providers generally require you to have a debit card to take out a loan. This is because they’ll use your card details to verify your identity and to collect payments. However, some specialist services, such as 'doorstep loan providers' who may be able to help you.
Can I get an emergency loan if I’m self-employed?
You can. But your options may be limited, compared with people with more traditional employers. If you can find a lender that will loan you money, you’ll need to provide proof that can meet your monthly repayment obligations.
Can I take out an emergency loan for any purpose?
Technically there are no restrictions on what you use your emergency loan for.
But it’s important to note that they’re really solely intended for short-term financial crises where the borrower does not have the money to cover an unforeseen expense, such as car repairs, boiler repairs or emergency travel.
Using emergency loans to cover day-to-day expenses can quickly trap you in a debt spiral, especially if you miss payments and rack up extra charges.
What documents do I need to show to get an emergency loan?
Typically, to get an emergency loan you’ll need to prove you’re a UK resident, that you're 18 or over and employed and that you’re earning over a certain threshold per month.
To prove your identity, you can generally use:
Driver’s licence
Passport
Blue Badge for disabled drivers
Armed Forces identity card
To prove your address, you can usually use:
Driver’s licence
Recent utility bill
Bank or building society statement
Tax bill from your local authority
Benefits letter
Tenancy agreement.
To enable lenders to check your income you can normally use:
Bank statements
Pay slips.
Can I get an emergency loan if I am unemployed?
Some payday loan companies will accept applications from unemployed borrowers. But you need to think about how you will pay off the loan as failing to do so will mean paying even more in interest and charges – and can also seriously damage your credit score.
Other types of loans you may be able to get while unemployed include secured loans that use an asset such as your home as security.
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Rebecca Goodman
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