You can be caught unawares by emergencies at any time. While various direct lenders are out there to provide you with small loans, borrowing might not always be the right option. Small loans are quite expensive, especially if your credit history is not stellar. Subprime borrowers are charged high interest rates as they are considered to be risky borrowers. The default risk is too high if your past payment record has not been stellar.
When you need money for small emergencies, you need an instant injection of cash. Since you are in urgent need of money, you are highly vulnerable to loan sharks. Further, there are various kinds of loan deals offered by lenders. You might end up choosing the one that does not work to your advantage.
Which options are safe?
When you need money urgently, of course, you cannot wait too long to arrange funds, but in a rush, you might choose a bad option. Here are some safe options that you should consider while considering money for emergencies:
Your savings
First off, you should look at your savings. Most people rush to direct lenders to borrow money, but this is not advisable. A golden rule of thumb says that you must have at least three months’ worth of living costs. Even if the savings are not that much, first you should try to dip into them.
- Savings do not cost you interest.
- Savings are accessible instantly.
If you need €1,000 and your savings can provide only €500, you can think of borrowing the rest €500, from a direct lender. Make sure that you prioritise dipping into savings over borrowing money from a lender.
Affordable small emergency loans
Emergency loans are small cash loans. The maximum amount you can borrow from small emergency loans is up to €1,000. These loans have been designed to help you meet small emergencies, such as:
- A car repair
- A laptop repair
- Small home improvements
- Medical bills
- Unexpected utility bills
These loans are also called bad credit loans when they are applied for by subprime borrowers. Interest rates are competitive. You should have a good credit rating if you want to avail yourself of lower interest rates.
Emergency loans are generally paid down in fixed instalments over a long period of time if they are large. Most of the time, lenders do not lend more than €1,000, and therefore they are paid off in one fell swoop. It is highly recommended that you carefully determine your repayment capacity.
Credit cards
When you need money for the unexpected, credit cards can also come in handy. However, they should be used only when you have insufficient savings. They are suitable to fund small expenses. As long as you can repay your credit card balance, you can use your credit card. Before using your credit card, make sure that you completely understand how it works.
For instance, some credit cards allow you to repay the balance in instalments, while others allow you to pay it off in one go after the bill is generated. Another thing to keep in mind is that your credit utilisation ratio does not go beyond 30%. Otherwise, it would lower your credit rating.
Which options are not safe and should be avoided?
You can easily find the following options in the market, but they are not safe for your financial health.
Payday loans
Payday loans are also aimed at subprime borrowers, but they are not the same as bad credit loans.
- Unlike bad credit loans, payday loans cannot fund large emergency expenses.
- Some bad credit loans are repaid in fixed instalments over a period of time, but payday loans are paid off in one fell swoop.
- Bad credit loans run soft and hard credit checks, while payday loans do not run credit checks.
- Instalment subprime loans can help improve your repayment capacity, but payday loans cannot, despite on-time payments.
Payday loans are short-term, high-cost debt. APRs of these loans are much higher than those of subprime loans. Since you are to clear the debt within a month in full, it can be very challenging to ensure a timely payment. In fact, a lender might lend you more than your affordability because no credit checks are run.
Loans like Provident
Loans like Provident in Ireland without a credit check should be avoided because they charge higher interest rates than payday loans. The APR of these loans can go up to 1500%. While lenders suggest focusing on the interest rate, the APR actually determines the cost of the debt.
Loans like Provident are small loans. The maximum amount cannot be more than €1,000, and therefore, they are required to be paid down in a lump sum on the due date. If you fail to repay your debt, you will have to roll it over, and if you roll it for the full one year, you will end up paying €1,500 as interest on the borrowed sum of €100.
Loans from unregulated lenders
There are various unregistered lenders who claim to provide you with small emergency loans without any credit checks. This is one of the reasons why subprime borrowers become tempted to borrow money.
Borrowing from unregistered lenders is not advisable because you are at risk of falling into an ongoing cycle of debt. If you fail to repay your debt, your credit score will also be badly affected. Another drawback is that you will not have the right to file a complaint against the lender, as you chose to borrow from them.
You will have to bear the consequences of non-payments despite borrowing from an unregistered direct lender.
The bottom line
When it comes to borrowing money during emergencies, you should ensure that you choose safe options. Avoid borrowing money from loan sharks and unregistered lenders. In fact, you should also avoid using short-term high-cost debt such as payday loans.
Your first priority should be dipping into savings. Consider stashing away money to meet small emergencies.
