Emergency loans are small personal loans that have been designed to help people tide them over when cash runs out. These loans can provide you with accessibility to cash when you need it urgently. Small emergency loans are a broader term. It includes a wide range of short-term loans that you are required to settle in one fell swoop.
Where can you find an emergency loan?
You can find emergency loans in the UK from direct lenders and credit unions. Banks do not provide small loans as they are generally aimed at subprime borrowers who struggle to manage their budget, and they are similar to payday loans, which are paid back in a lump sum.
How do emergency loans work?
Emergency loans do not involve a lengthy and complicated process. As soon as you submit your application, a lender quickly checks your credit score and the details of income and expenses that you provide in the application form. Some lenders require you to submit a bank statement.
After the approval of your loan, you will receive money directly in your bank account, which you can use without any restrictions. You will be required to discharge the debt on the due date, which is less than a month away.
If you settle the whole debt on time, your credit score will remain unchanged, but if you fail to make it on time, you will see a significant drop in your credit score. Apart from that, interest will keep accruing until you pay it back in full.
How much does an emergency loan cost?
Emergency loans charge high interest rates even though your credit score is stellar. The actual cost of the loan is determined by the APR (Annual Percentage Rate). Though you do not have to pay back as per the annual percentage rate, it suggests how quickly the cost of the loan will spiral up if you end up rolling it over for a whole year. The APR for a small emergency loan can climb up to 500%. It means if you borrow £100 and roll it over for an entire year, you will end up paying five times the borrowed sum in interest.
APRs and interest rates are not interchangeable. The latter is part of the former. An APR includes interest rates, fees and associated charges. People usually ignore the APR when comparing the total cost of the loan, as they think they will close the account by paying it in full. The fact is that the repayment length is too short, so they end up falling behind on payments. This is when the debt starts spiralling up due to late payment fees. Bear in mind that APRs vary by loan. In some cases, it can straightaway go up to 1500%.
It is always recommended that you borrow money from the FCA authorised lender as they do not charge outrageously high interest rates. If you find that you have been offered an expensive deal, you can make an affordability complaint, which is never viable if you borrow money from unregistered lenders, also called loan sharks.
What are the alternatives to small emergency loans?
If you find that emergency loans are expensive or you will not be able to pay them back on time, you can consider other alternatives.
Borrowing from friends and family
Borrowing from friends and family is the cheapest alternative, especially if you do not want to pay interest. Your close friends will most likely be willing to help you in your hour of need. However, it is recommended to pay some interest on top of what you borrow to protect your buying power.
You can pay back money as per your convenience. If you make an agreement, it will be beneficial for both parties. You can even decide to pay back in instalments, rather than in a lump sum.
Credit cards
If you have a credit card, you can use it provided the credit card limit covers the loan amount, but make sure that you do not end up maxing it out. Utilising more than 30% of your credit card limit will lower your credit score.
Credit cards should be used if you are absolutely certain that you will pay back the balance within the grace period. If you miss the payment, you will end up being charged very high interest rates. Note that interest on credit cards accrues by the day.
Personal loans
Some lenders provide small personal loans. You can borrow between £100 and £1,000. They work the same way as small emergency loans, but they charge lower rates in relation to payday loans. Though personal loans are cheaper than instant loans, accessibility to cash cannot be the same day you put in a loan application. Personal loan providers run hard credit checks even if the loan amount is small. They might temporarily hurt your credit score.
Overdrafts
Overdrafts can be an option, but use them as a last resort. They are very expensive as they charge interest by the day. Interest starts accruing as soon as you use an overdraft. It is easy to run up an overdraft, so make sure that you will pay it back in full once and for all.
Buy now, pay later schemes
Buy now, pay later schemes are available in many stores. If you cannot purchase something outright, you can use this scheme to pay back in instalments. However, each instalment uses the interest amount. At the time of signing up for this deal, make sure to calculate the total cost.
Budgeting loans
Budgeting loans are available for those who are on benefits and need money to meet their essentials. These interest-free loans are available from the government. The loan amount is deducted from your benefits in fixed instalments.
To wrap up
Emergency loans are quickly accessible, but they charge high interest rates. It is recommended to exercise caution while using these loans. Try to consider other alternatives too. You might find them more affordable than emergency loans.
