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How do emergency loans work?

Emergency loans, sometimes referred to as short-term or payday loans, can provide fast access to cash if you don’t have enough funds to cover an unexpected expense.

What would be an emergency? Imagine that your car breaks down on the side of the road and needs urgent repairs. Or you get a higher than expected medical or utility bill which throws out your monthly budget. When this sort of thing happens, usually you’ll need to pay up fairly quickly.

If you can’t or don’t want to ask to borrow the money from family or friends, emergency loans can help.

While emergency loans can get you out of a tight financial spot, they do come at a cost and depending on the lender, can come with high fees.

Before you take one out it’s important that you understand how they work and whether an emergency loan is right for you.

How much can I borrow with an emergency loan?

Emergency loans typically allow you to borrow anywhere between $500 and $2,000. Your repayment schedule will usually align with your pay cycle, with the funds deducted on the day you get paid.

You’ll also need to budget for fees on top of your loan repayments. This includes establishment fees (which can be up to 20% of the amount borrowed), plus a monthly loan fee of up to 4% of the amount borrowed.

These fees are the maximum allowed to be charged as governed by the National Credit Act and although most emergency lenders choose to charge these rates, there are a select few, including Fair Go Finance, who offer cheaper rates on their small loans based on your credit score.

You may also be charged government fees, plus any default or late fees if you fall behind on your repayments.

Always ask your chosen lender to confirm any fees before you lodge your application. They should also provide you a clear repayment schedule so you know exactly how much you need to budget. You can also use a personal loan calculator tool to get a rough indication for how much you might pay.

How do emergency loans work?

Like most credit products, you can lodge an emergency loan application online. Most emergency loans offer a quick turnaround time, often within a business day or less.

As indicated earlier, it’s important to note that not all emergency loans are exactly the same and do depend on the lender that provides them.

For example, some emergency loans may not require a credit check as part of the application process. In this situation, the lender may make a decision based on your current financial situation like your income and existing debts. This means it’s up to you to make the call that you can afford to take out the loan and given it is often for an emergency, the decision can be a difficult one to make. The key is, always make sure you borrow responsibly – you don’t want to take on more than you can afford to repay.

Alternatively, some lenders will require a credit check in accordance with their lending policies and responsible lending guidelines.

Credit checks are very common practice with most credit products in Australia. By actively knowing what your credit report has in it and what your credit score is, you can do many things to help improve your credit rating. By doing so, you can then help achieve your financial goals, such as buying a new car and getting a mortgage.

Pros and cons of emergency loans

Pro: Fast processing time

If you’re approved, you can expect to receive the funds in your account within a couple of business days. This can provide fast financial relief in an emergency, like needing to book an emergency flight.

Pro: Clear repayment schedule.

Your lender should provide a clear repayment schedule that will outline how much you can expect to pay each time. This can make it easier to budget.

Con: Higher fees.

This type of loan can typically comes with higher fees or rates which can make it more expensive to repay.

If you only need a small amount of money and you can afford to repay your loan quickly, then an emergency loan can come in handy when you’re in a jam.

But additional fees and higher interest rates mean that emergency loans can be more expensive than other loan products. For this reason, you should only rely on them for small financial emergencies, and not as a long-term repayment option.


Written by Kate Browne.

Kate Browne is a personal finance expert at Finder.

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