Life is unpredictable, so having a safety net for unexpected financial challenges is crucial. Emergency loans are one of the most reliable options for these situations, offering quick relief with a simple and convenient application process, especially with the rise of online lenders.
To better grasp how emergency loans work and their impact on credit, we’ll define this financial tool, explore its various uses, and discuss how borrowers can leverage it to their advantage.
What is an Emergency Loan?
With an emergency loan, borrowers can access funds from credit facilities almost instantly to meet unexpected expenses. Emergency loans are instant short-term loans, generally lasting from a few months to a maximum of five years.
Emergency loans can be used for a variety of unexpected situations, including vehicle repairs, medical emergencies, travel expenses, home renovations, and other unplanned costs. In today’s digital world, these loans have become more accessible than ever, making it easier for consumers to get the financial help they need when urgent expenses arise.
Many lenders offer online emergency loans, and they only consider two crucial factors: the borrower’s credit score and income. This means having healthy credit and a stable income is essential to getting approved quickly.
For example, someone with a credit score of 806 is likely to receive better loan terms, such as higher borrowing limits, than someone with a lower score. For more information on credit score eligibility for emergency loans, let’s discuss more in the following sections.
What is the Minimum Credit Score for an Emergency loan?
Lenders have varying credit score requirements depending on loan types. However, borrowers typically need at least a FICO score of 580 to 669 (fair credit) to qualify for emergency loans. Of course, the better the credit, the better the loan terms the borrower will secure. Anything between 670 and 739 is a good FICO score, and excellent numbers range from 740 or higher.
Better credit is one qualification. However, it is still possible to qualify for emergency loans with bad credit. The loan types available can be limited, and the terms will be less flexible than for borrowers with good credit scores.
How Does Emergency Loans Affect Credit?
Known as unsecured personal loans, emergency loans require a hard credit inquiry from the lender. This means that the lender will request the borrower’s credit info from credit bureaus to determine if the borrower’s credit meets the underwriting criteria based on their credit info.
As a result, emergency loans can cause a temporary dip in the borrower’s credit score. While the score may drop in the short term, usually for a couple of months, the loan will remain on the credit report for up to two years.
Borrowers should note that multiple inquiries can give the impression that they are applying for many loans simultaneously. So, it’s essential to pre-qualify with lenders first to know the approval odds and avoid credit hits.
Conversely, emergency loans can boost credit scores if borrowers make timely, in-full payments, giving them a strong payment history. In FICO credit scores, payment history accounts for 35% of the calculation. This means it’s one crucial factor that impacts credit scores.
Taking out an emergency loan can also improve borrowers’ credit mix. By definition, Experian explains credit mix as “a factor of your credit score that accounts for the variety of revolving and installment accounts you have.” In FICO credit scores, the credit mix accounts for 10% of the calculation, making it a considerable factor affecting credit scores.
Different types of accounts contributing to the credit mix are personal loans, credit cards, mortgages, and car loans. For borrowers planning to take out an emergency loan for the first time, this can give them a better credit mix, boosting their credit score.
On the downside, taking out an emergency loan without the ability to repay it can harm credit scores. Late or missed payments can significantly lower the score, leading to a negative credit history.
Eligibility Requirements for Emergency Loans
Besides the credit score, lenders of emergency loans also look at the following eligibility requirements:
- Debt-to-Income Ratio (DTI). The debt-to-income ratio refers to how much a borrower owes monthly versus how much they make monthly. The lender may not approve the emergency loan if the borrower has a high income but a large debt load.
- Sufficient Income. Lenders will also examine pay stubs and other proof of the borrower’s income to ensure that the borrower makes enough money to pay off the loan.
- Proof of Address. Lenders will likely favor borrowers with a home address, which shows that their living situation is steady and that they do not frequently change addresses.
- Proof of Identity. Lenders will also verify the borrower’s personal information through any proof of identity, such as social security cards, license cards, and insurance cards, among many other identification documents.
Ready to Apply for an Emergency Loan?
Before applying for an emergency loan, borrowers must gauge their financial situation and weigh the advantages and disadvantages of taking one out. Moreover, evaluating the eligibility requirements and assessing one’s unique needs are necessary for a successful emergency loan application. This financial tool can impact the borrower’s credit, but the long-term effect can be favorable if the borrower can manage the loan responsibly.
