3 Reasons a Personal Loan Can't Be Your Go-To Option for Emergency Expenses
- A personal loan lets you borrow money for any purpose.
- While you can use a personal loan to cover emergency expenses in theory, you can't bank on that option.
- You could have trouble getting approved for a loan at an affordable rate, or you may need money sooner than a lender can provide it.
You're much better off having the money you need in savings.
There may come a point in time when you find yourself needing money in a pinch. It could be that you need to repair your car so you can commute to work, or it could be that your heating system has gone kaput and without a new one, you'll be looking at some very cold nights.
That's why it's a good idea to have an emergency fund -- money in savings you can access when unplanned bills pop up that can't be put off. But many people don't have money in savings to cover emergency expenses. If you're one of them, you may be thinking you'll get by without savings because you can always just apply for a personal loan if a financial crunch arises.
A personal loan lets you borrow money for any purpose. And if you have great credit, your chances of qualifying for a personal loan are higher.
But while a personal loan could potentially bail you out in a financial crisis, you can't assume that strategy will work. Here's why.
1. You may not qualify for a loan
Personal loans are unsecured, which means they aren't tied to a specific asset (whereas auto loans and mortgages are secured by the assets they're helping you purchase -- your car and your home). For this reason, it generally takes a decent credit score to qualify for a personal loan. If your credit isn't in the best of shape, you may not end up getting approved for one of these loans -- and that could leave you in a very bad spot if a financial emergency arises.
2. You might qualify, but at a rate that's prohibitively expensive
The stronger your credit score, the more favorable a borrowing rate you're likely to lock in on a personal loan. If your credit is poor, you might still manage to qualify for a personal loan -- but you might also get stuck with a super-high borrowing rate. And that rate might render your monthly loan payments completely unaffordable.
Remember, lenders take on a fair amount of risk with personal loans because there's no asset they can go after if you fall behind on your payments. So when lenders present a higher interest rate to borrowers with poor credit, they're not doing it out of spite -- they're doing it to make sure the financial upside is enough to compensate for the greater amount of risk they're taking on.
3. You may not get your loan proceeds in time
Personal loans often close quickly. But sometimes, a loan's funding can be delayed. Meanwhile, in a true financial emergency, you might have to come up with money right away. And in that case, waiting even a week for your personal loan proceeds could be a problem.
Don't assume you can fall back on a personal loan
While you might think relying on a personal loan as your emergency fund is a reasonable option, a far safer bet is to sock some money away in your savings account in case a sudden bill lands in your lap. That way, you won't have to worry about being denied a loan, getting stuck with an unaffordable interest rate, or facing a delay that puts you in a very precarious position.
Our picks for the best personal loans
Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing our picks for the best personal loans.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2024 The Ascent. All rights reserved.