Gino Rodriguez, Writer
@gino_rodriguez
Emergency loans are a bad idea if you’re not going to use the money for a true emergency, you haven’t fully explored alternatives, or you settle for a loan with a high interest rate and high fees. For example, payday loans offer quick funding but are so expensive that they can do more harm than good.
On the other hand, taking out a traditional personal loan from the right lender in the face of an emergency is not a bad idea, as long as you’re confident you’ll be able to make the necessary payments. Personal loans that are used for emergencies typically have lower rates than other types of emergency loans, but they have potential to damage your credit because lenders report payment information to the credit bureaus every month. If you fall behind on payments, the negative information will damage your score.
Below is a list of a few things that you should look out for when deciding whether an emergency loan is right for you.
Why Emergency Loans Can Be a Bad Idea
- High interest rates and fees: These loans are designed for people who need quick cash and are willing to pay a premium for it. If you're not careful, you could end up paying much more than you borrowed.
- Can lead to a cycle of debt: If you take out a loan and are unable to repay it on time, you may be tempted to take out another loan to cover the first one. This can lead to a dangerous cycle of debt that is difficult to escape.
- Can have a negative impact on your credit score: If you're unable to repay an emergency personal loan on time, it will be reported to the credit bureaus, which can lower your credit score and make it harder to get approved for loans in the future.
You should only get an emergency loan if it’s necessary and if you're confident you can repay it on time. If possible, explore other options, such as a credit card with a 0% introductory APR or borrowing from friends and family.
For more information, check out WalletHub’s emergency loan guide.
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