There are times in life when you may need cash for an emergency. Your boiler could go into breakdown, your car could break down, and you could get a bill you didn’t expect. What will you do then? These can be stressful situations if you are on a tight budget, if you do not have enough savings or if you are waiting for your next payday. In times such as these, an emergency loan can appear like a fast means of acquiring the cash you require.

Exactly what is an Emergency loan?

Emergency loans are not a type of loan with a particular definition. Rather, it is a general term that applies to any type of loan that’s meant to be repaid rapidly, typically for an unforeseen and urgent cost. Emergency loans are typically processed and approved faster than a typical loan, as speed is important.

There are a number of types of borrowing, which are sold under the guise of “emergency loans” and include:

• Short-term personal loans from direct lenders
• Payday loans, which offer small amounts over a very short period
• Government support such as Universal Credit advances or Budgeting Loans
• Credit union loans
• Credit cards or authorised overdrafts used for a one-off cost

The best one is the one that suits you the best, according to your needs, the amount of money you are looking for, and, of course, how soon you can pay it back.

When Might You Need One? Common Reasons People Borrow in an Emergency

Ever had a situation where you are hit with a price tag you just didn’t expect? You’re not alone. Emergency borrowing is often considered for some of the following reasons:

• A broken boiler, cooker or fridge which requires an immediate replacement.
• Car repairs, particularly if you need to use your car to commute to work.
• An unexpected bill, such as a rent shortfall or a bump in energy costs.
• Emergency dental or medical costs.
• Cost of a funeral after the loss of a loved one.
• Recovering items after burglary, fire or flood, and replacing essential items.

See that all these are necessary and unavoidable expenses. An emergency loan is typically not a suitable choice for a planned expense that you can save for or compare financing options for, and then select a more economically friendly option, such as a holiday or wedding.

Payday Loans: The Quick Fix That Can Cost You More

Payday loans are a result of the first searches when someone looks for an emergency loan. They’re usually quick to apply for. Also, some lenders will pay the money into your account within hours. But before you go ahead, it’s important to understand what you’re signing up for.

Payday loans are short-term loans, typically intended to help you get through until your payday. They offer extremely high rates of interest when compared to other types of borrowing. Many are also configured to have a Continuous Payment Authority, so that the lender can charge your debit card, often without notifying you first. This can cost you other bills, such as rent or groceries, if your account doesn’t have sufficient funds.

Late payments can impact your credit file as well and make it more difficult to gain access to affordable credit in the future. A payday loan may seem like a temporary solution for the problem, but it can lead to an even bigger financial issue if you have to borrow again the next month.

Questions to Ask Yourself Before You Borrow

Regardless of the type of emergency loan you’re thinking of getting, you should take some time to reflect on a few questions:

• Will I be able to afford the repayments, even if my income is different or if I get an unexpected bill?
• Am I receiving any form of support that I am entitled to, for example, a Budgeting Advance or a council crisis fund?
• Can I work out the total amount of the loan, as well as the monthly repayment amount?
• Am I taking a loan from a direct lender who will treat me fairly or from a broker who might levy additional fees?
• Can this cost be shared in some other manner, even if it takes a little longer?

It’s okay to take out a loan. Taking a moment to think through it can save you a lot of stress further down the line.

Safer Alternatives to Emergency Loans (and Payday Loans)

These are the other options that should be considered before taking out any loan. Many do not have any interest, or are much more affordable than payday loans.

1. Government Budgeting Advances (for Universal Credit claimants) 

You can get an interest-free Budgeting Advance from the government if you are on Universal Credit.

You can use it for:

• Household supplies that are needed to replace or repair 
• Costs associated with work 
• Home repairs
• Funeral costs
• Moving costs  

How much can you borrow?

• £100 minimum
• Up to £348 if you’re single
• Up to £464 if you’re in a couple
• Up to £812 if you have children

Requirements: 

Must be on benefits for at least 6 months (unless the money is needed to work or to have a job) and have earned less than £2,600 in the previous 6 months (or £3,600 for couples). 

What to do:

 Call the Universal Credit helpline on 0800 328 5644, keep a journal or talk to your work coach. 

2. Credit Union Loans

Credit unions are community banks that return a better rate of return to their members than profit banks.

• Typical loan sizes are from £50 to £3,000
• Interest rates are kept at 42.6% APR, which is much lower than those of payday loans (1,500%+).
• The majority of them provide same-day choices and versatile reimbursement terms.

The local credit union can be found at the Association of British Credit Unions or on 0800 015 3060.

3. Salary Advances from Your Employer

A few employers provide salary advances or emergency loans to employees.

• Often interest-free or low-cost
• Repaid through payroll deductions over several months
• No impact on your credit score

Check with your HR department or manager to see if this is possible.

4. Fair Finance Personal Loans

If you need to borrow and have explored the options above, a personal loan from a responsible lender may be a more affordable alternative to a payday loan. Fair Finance is a not-for-profit social lender that offers affordable personal loans and checks that repayments are manageable before lending.

Typical loan sizes:

• From £400 to £1,000 (up to £3,000 for existing clients)
• Fixed weekly or monthly repayments
• No early repayment fees

Suitable for:

• Unexpected essential expenses
• Household repairs or replacements
• Spreading the cost of necessary purchases over affordable monthly payments

Before applying, make sure you can comfortably afford the repayments and compare your options. Borrowing should only be used when it’s the right solution for your circumstances.

5. Bank Overdrafts

This can be a cheaper alternative to payday loans compared with an authorised overdraft from your bank.

• Typical interest is about 40% APR, which is high, but not nearly as high as 1,500%+ charged by payday lenders.
• Authorised overdrafts are available from some banks, and they are interest-free.
• Please review fees and limits prior to use.

5.0% (if you have good credit) Credit Cards

A 0% purchase credit card may offer interest-free borrowing for as long as 12 to 21 months, if you qualify.

• Simply make sure you are able to pay off before the 0% window expires.
• Make the full payment on time to prevent paying interest.

6. Borrowing from Friends or Family

A loan from someone you know and trust might be interest-free and flexible.

• But be clear about repayment terms to avoid relationship problems.
• If possible, put it in writing.
• Make sure you can afford the minimum monthly repayment

7. Local Welfare Assistance Schemes

Your local council may be able to give you welfare support; this can be in the form of vouchers for essentials, access to a food bank or pre-payment cards if you are struggling to pay for food, heating and other essentials.

How Borrowing Affects Your Credit Score

Regardless of the type of loan, it’s important to know how it may impact your credit file. Generally, a hard search is a credit inquiry that is made when someone applies for credit. If you apply for several different types of loans in a short period of time, it will appear that you are a bad risk to future lenders, even if you have passed the tests for each of these loans.

Conversely, paying your loans on time and in full over time can make a positive credit history. Late and missed payments may make it more difficult to access lower rates of credit in the future.

How to Avoid Needing Emergency Loans in the Future

Avoid Emergency loans, and the best way to avoid them, especially payday loans, is to create a small emergency buffer.

Here are some tips to get started saving:

• Start target £500 – £1,000 for a starter emergency fund
• Set up automatic standing orders (even £10/week adds up)
• Take advantage of currently high-interest savings accounts (4-5%)
• Reduce unnecessary expenses as far as practicable
• Check if you’re eligible for all benefits you’re entitled to using our free Benefits Calculator

In summary…

Emergency loans are definitely one of the lifelines in real crises, but they are not applicable to all. Safer and cheaper alternatives are available for many people on benefits or with a low income or poor credit scores.

Before you apply for a loan, ask yourself, “Is this cost necessary?”,”Will I be able to make the repayments without becoming hard hit?” Remember, if you borrow money from a payday lender, you may fall into a debt trap that you can’t get out of. But with the right support and information, you can find a safer path forward.

If you’re unsure where to start, free, impartial advice is just a phone call away. You don’t have to face financial stress alone.