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.
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.
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.
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.
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.
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.
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:
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: