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Life is unpredictable. You may have planned your monthly budgets, investments, retirement funds and more, but suddenly out of the blue life throws a curveball at you. There are plenty of situations in life, where emergency loans become necessary. A medical emergency in the family, immediate home repairs after the monsoon season, vehicle repairs after an unexpected accident, even tax saving investments at the last moment – are some of the many circumstances, where we require cash fast.
Personal loans are the most popular option to avail quick cash during emergencies. However, if you have a poor credit score, then your personal loan application may not be approved. What do you do in such cases? Worry not! Here in this guide, we list out five emergency loans that you can opt for, even when you have bad credit.
What Are Bad Credit Loans?
As the name implies, bad credit loans have been designed for individuals with no or poor credit scores. Lenders usually consider the credit score and credit history of an individual before sanctioning a loan. Higher the credit score, lower are the chances of the individual defaulting on their loan payments. It decreases the risk of the lender.
On the other hand, individuals with low or zero credit scores have a higher chance of defaulting on loan payments. Hence, lenders do not extend loan facilities to individuals with bad credit.
This is where a bad credit loan comes to the rescue of individuals who have poor credit. There are several types of bad credit loans. You can choose the right loan type based on your requirements and other criteria.
5 Types of Emergency Loans for Individuals with Bad Credit
1. Credit Card Cash Advance
Not many borrowers are aware that a credit card offers instant cash in emergencies. Credit card cash advance (also known as credit card cash withdrawal) allows cardholders to withdraw cash from an ATM.
To withdraw cash using your credit card, all you have to do is visit your bank’s nearest ATM and use your credit card, just like a debit card to withdraw cash. The available cash limit varies based on your card type and your card’s credit limit. To know the available cash limit on your credit card, check online at your bank’s site or visit the nearest branch of your card issuer.
The biggest benefit of a credit card cash advance is that it’s instant. If your card offers this feature, you can instantly use it without having to get any approval from your cardholder. Another advantage is that it doesn’t impact your credit score separately. The credit card due amount is reported as a whole. It includes your monthly credit outstanding along with cash withdrawals, if any.
Pros:
- Instant cash, you can withdraw the amount instantly from your bank’s ATM
- No separate loan application or documentation required
- Flexible loan limits based on your credit card repayment history
Cons:
- High-interest rates
- No interest-free period – the interest is charged on cash withdrawals right from the day you withdraw the amount
- Besides the interest, you are charged with other fees like cash advance fee and more
- Credit card cash advances do not qualify for reward points like other online/offline credit card transactions
2. Payday Loans
A payday loan is an easy-to-avail, unsecured loan that can come quite handy during a financial crisis. Borrowers can easily avail of a payday loan online at any of the several digital lenders who offer this loan in India. Typically, a borrower must repay the entire loan amount on the next payday, hence the name.
A payday loan is highly beneficial for employed professionals who earn a monthly salary and require emergency cash but have poor credit scores. You can take a payday loan to meet your household expenses, pay your regular bills, or meet any other emergency requirements.
Generally, the borrower has to provide a post-dated cheque for the borrowed amount plus interest while availing the loan. This check is the security the lender needs.
Pros:
- Short term emergency loans that have to be paid before/on the next payday
- Do not require collateral or a guarantor
- Can be availed even if you do not have a credit history or a bad credit history
- Fast loan approval
- Instant funding timeline
- Minimal documentation and less stringent eligibility checks
Cons:
- Interest rates as high as 35% or even more
- Very short tenures – generally ranging from 2 to 4 weeks. The borrower has to repay the loan amount within this short duration.
3. Home Equity Loan
Just like a home loan, home equity loans are secured loans, where your home acts as the collateral. The eligible amount you can borrow using the home equity loan is
The maximum borrowed amount under home equity loan = current market value of your home – the total outstanding amount payable towards a home loan.
Just like a home loan, the repayments include both the principal and interest. Since home equity loans are secured, qualifying for it is easy, and most lenders do not consider the credit scores of the borrower.
Pros:
- Easy to qualify – even for borrowers with bad credit
- Helps you monetize the value of the asset you own – in this case, your home
- A higher loan amount that helps you meet major emergency expenses
- The fixed interest rate for the entire tenure of the loan
Cons:
- No tax benefits
- Since you provide your home as collateral, if you default on the loan repayments, you risk losing your home
4. Loans against Insurance Policies
Just like home equity loans, it's another secured loan that comes to the rescue of borrowers with bad credit during an emergency. Instead of pledging your home as collateral, here you pledge certain types of insurance policies like traditional endowment plans, money back plans as collateral.
Life insurance plans that have a surrender value are acceptable to banks. Banks generally sanction amounts ranging from 85% to 90% of the policy’s surrender value.
Pros:
- Easy to avail, even with poor credit
- Quick loan sanction usually within seven days
- Flexible repayment tenures with interest-only repayments
- Lower interest rates compared to other secured loans
Cons:
- You risk losing your retirement fund if you default on loan payments
5. Borrow from friends and family
In an emergency, you can avoid the hassles of providing documentation and other requirements by borrowing from your friends and family. Your closest friends and family members are likely to be sympathetic to your situation and offer you the required loan amount.
Pros:
- You can avail loans with zero or minimal credits
- Flexible repayments, as your friends and family are aware of your situation
Cons:
- You have the potential to ruin the relationship if you're unable to repay the borrowed amount on time
- Your friends may not be able to provide you with the required amount if they are facing a financial crisis in their lives
While it's possible to avail emergency loans with bad credit, most of these loans come with high-interest rates that could further deepen your financial crisis. The smarter choice here is to build an emergency fund to tide you during emergencies. Also, make sure to compare the options available and choose the right loans that are affordable and flexible.
Also, you can work on boosting your credit score, so that you can avail loans at better interest rates.
FAQ for Emergency loan for the borrowers with bad credit:
- How soon can I get an emergency loan?
An emergency loan is processed within 24-48 hours.
- Will emergency loans impact my credit score?
Yes, emergency loans do have a negative impact on your credit score.
- What are some of the emergency loan options for people with bad credit?
Personal loans, credit card cash withdrawal, payday loans, borrowing from friends and family, and home equity loans are some options available for emergency funding for people with bad credit.
- Can I apply for an emergency loan without a job?
You can apply for an emergency loan without a job as long as you can show a stable source of income.
- Can I get a personal loan without a credit score?
If you have bad credit or no credit history, you can still apply for a personal loan by submitting proof of income.