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emergency loans

 

Guide to taking out an emergency loan

 

Need a loan in a hurry? Make sure you're fully informed with our guide to emergency loans

By Jess Bown

Published: 12 August 2021

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What is an emergency loan?

Emergency loans, also known as payday loans, are designed for short term cash shortages.

If the car you use to get to work breaks down, for example, but you don’t have the money to pay for repairs until your next payday, then you might need an emergency loan.

But these loans are not suitable for long-term borrowing as the interest rates tend to be very high.

A payday loan is also not the only way to get your hands on emergency cash. If you’re on certain State benefits you may be eligible for an interest-free budgeting loan from the Government.

Other options include asking your bank to arrange an overdraft on your current account or using a cash advance credit card.

What can I use an emergency loan for?

Emergency loans are expensive so they should only be used when you really need the money.

If, for example, your car breaks down but you can manage without it for a few weeks, it is likely to be cheaper to wait to do the repairs after you’ve been paid than borrow on a loan with a very high interest rate.

It's important to consider whether you’ll be able to repay a loan of this kind on time, as the penalties charged for late payment can make emergency loans even more costly.

How much can I borrow with an emergency loan?

Payday loans can range from £50 to £1,500, but typical amounts borrowed are likely to be in the region of £100 and £500. The amount you can borrow will depend on your circumstances, including your income and employment status.

Who offers emergency loans?

Short term loans are offered by a range of providers, including online lenders, credit unions, and payday loan companies. But short term borrowing generally means paying high fees that often lead to an equivalent annual interest rate (APR) of more than 1000%. This is why they should only be used in an emergency.

The regulator, the Financial Conduct Authority (FCA) has cracked down on providers by capping the amount regulated emergency loan providers can charge at £24 per £100 over a 30-day term and limiting the late payment fees to £15 (plus interest). However, emergency loans remain a very expensive way to borrow.

Even if you have a poor credit rating it is worth considering applying for a cheaper loan lasting 12 months or more to avoid getting into further financial difficulties. Loans offered through MoneySuperMarket all have a term of 12 months or longer.

Check out our loans for bad credit page for more details on the pros and cons of this route.

What do I need to know about 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)  
  • Not all emergency loan providers are approved by the FCA, so it’s much harder to complain if you’re unhappy with the service provided.  That’s why it’s best to only borrow from FCA-authorised lenders 

Can I get an emergency loan if I have bad credit?

You do not necessarily need a good credit score to qualify for an emergency loan. Payday lenders often run less stringent credit checks than personal loan providers, for example.

That said, there is no guarantee you will be accepted for an emergency loan. To avoid further damaging your credit file with a rejected loan application first get hold of your free report through credit monitor 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, approaching a debt charity such as StepChange or Citizens Advice for advice on working out a more affordable payment plan.

Can I get an emergency loan if I am unemployed?

Some payday loan companies will accept applications from unemployed borrowers. But you need to consider 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. Guarantor loans, which require a friend or family member to act as a guarantor in the event you are unable to pay your loan are another option.

But in all cases you’ll still need to consider how you will meet the repayments on the borrowing.

How else get I get cash quickly?

The high fees associated with emergency loans mean it’s always sensible to consider a range of options before borrowing money this way.

There are potentially lots of ways to get the cash you need in an emergency.

Alternatives to consider might 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 beware: 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 to make a necessary purchase, such as a new washing machine, using a credit card can give you between around 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 a low credit score, 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
  • Personal loans – also known as unsecured loans, these are usually 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
  • 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 budgeting loans – these interest-free loans are available to people who are struggling financially and have been claiming certain benefits, such as Universal Credit, for at least six months
  • 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
  • Buy now pay later  – many retailers allow you to spread the cost of expensive items, typically across three payments, sometimes for no extra cost or interest charge
  • 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

What should I do if I am struggling with debt?

It’s vital 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 debt charities such as 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:

Guaranteed acceptance loans

What to do if you’re struggling with a loan

Borrowing with a poor credit history

Payday loans – what if I can’t repay?