Life can be unexpected sometimes. Find out what emergency loans are.

Life can often throw up unexpected situations where you may find yourself in need of extra cash. You may consider borrowing a loan when you don't have adequate liquidity. While a less-than-perfect credit score can feel like a roadblock, it doesn't mean you're out of options. If you're facing an urgent expense, there may be specialist emergency loans designed specifically for those who don't fit the 'standard' lending box.

If you’re in a position where you need a loan urgently but have bad credit, you’ll want to become aware of your options. But it’s important to always make sure you can afford repayments on any loan you take out.

What is an emergency loan with bad credit?

Loans that are available in the market to take care of unexpected personal expenses are commonly known as emergency loans. It’s important to clarify that, while emergency loans aren’t a particular type of loan, some refer to emergency loans as a form of borrowing to cover those urgent expenses.

Apart from offering loans to applicants with stellar credit scores, some lenders may also extend these emergency loans to borrowers with bad credit reports. These are known as emergency loans for bad credit.

Types of emergency loans

Emergency bad credit loans in the market can be classified into the following categories:

Loans for personal use

Personal loans for bad credit can be borrowed to meet any type of personal expense. Your credit rating may influence how much you are eligible to borrow, as these loans often have more flexible credit criteria than traditional ones.

Usually, these are extended as unsecured loans, but it is also not unusual for lenders to offer personal loans against security, such as real estate or cars.

Small amount credit contracts (SACCs)

This is another popular type of emergency loan for bad credit. For small amount credit contracts (SACCs), fees are tightly capped by law. For many of these loans, the law limits establishment and monthly fees, and total charges are capped. SACC providers must hold an Australian credit licence and comply with current credit laws, including assessing that credit is suitable and affordable under the National Credit Code.

These loans may be processed quickly once assessment is complete, and funds may be available within a short time, though all lenders must assess affordability and suitability as required by law. Actual funding and first repayment dates depend on the lender and your contract. SACC providers must conduct appropriate credit checks and assess affordability under responsible lending rules, though the specific checks may vary between lenders.

WARNING - Do you really need a loan today?

Secured car loans

If you need emergency loans with bad credit, you can provide your vehicle as security in favour of the lender, in lieu of getting a loan. It’s important to know the lender can seize the vehicle if you default on repayment.

Typically, the borrower's credit reports may not be the primary factor when reviewing the loan application. Moreover, these work as these loans may be processed quickly in some circumstances, though approval depends on your individual situation and the lender's assessment requirements. This is a good option where the asset is the primary factor, as the asset may be considered alongside income assessment for approving such loans.

Advance against your credit card

When you require emergency cash immediately, your credit card issuer can extend an advance against your credit card. The APR for such a loan is higher than what's otherwise applicable on your card. The credit card issuer may also levy additional processing and transaction fees. Interest also starts accruing as soon as you borrow.

How do emergency loans work?

Emergency loans help you to pay for unexpected costs and expenses. They are usually unsecured and may be processed more quickly than traditional loans, subject to the lender's assessment and responsible lending checks. You can fill in the loan application online. Approval depends on the lender's assessment of your financial situation and ability to repay, which is required under responsible lending laws.

Opting for emergency loans may be useful in some cases, but lenders must assess your ability to repay regardless of employment status.

What can I use an emergency loan for?

The most common end uses of quick emergency loans include:

• Rental payments: For upcoming rent or home loan repayments, you can take out an emergency loan to discharge your obligation. Paying your dues on time may help avoid a default listing, which could negatively affect your credit reports. You may be able to access a no-interest loan program supported by government and community organisations (such as NILS) to help with essential expenses like rental bonds. Such loans do not carry any additional fees or interest and can help those with poor credit reports to pay for rental costs and moving expenses. However, such loans are typically only available to Australian citizens or permanent residents.

• Utilities: You can also use the loan proceeds for timely bill payments. Staying on track with these payments may help avoid a negative impact on your credit reports.

• Funeral expenses: If you don't have sufficient cash to pay for a funeral after the death of a loved one, proceeds of the loan can be used to cover the costs.

• Home repairs: If there are urgent home repairs pending but you don't have enough liquidity to meet the expenses, you can borrow a loan to cover the costs.

How to compare emergency cash loans for bad credit?

Here's what to keep in mind when you compare various offers for emergency bad credit loans:

Check if you can pre-qualify

There are some lenders in the market that allow borrowers to pre-qualify for bad credit emergency loans.

You can submit details of how much you need to borrow, your income, and your credit report information so the lender can estimate what you might qualify for. In most cases, pre-qualification may involve a preliminary credit check that typically does not affect your credit reports. Note that under the Privacy Act, you are entitled to access one free credit report from each of the three bureaus every 3 months. As a result, you can browse through more options before you decide. You can also exclude lenders who have more stringent requirements for extending emergency personal loans.

Consider the purpose of your loan

Before you apply for a bad credit emergency loan, consider the purpose of your borrowing. Even though such loans are available to be utilised for a variety of personal reasons, lenders may restrict use to essential expenses. If you need the money for something else, you may have to specifically get a sign-off from the lenders or apply for specialised loans such as emergency medical loans for bad credit.

Check for additional fees

Most lenders charge additional fees for extending an emergency loan with bad credit. This can include processing fees, origination fees, delayed repayment fees, and prepayment penalties. Make sure to consider this factor when browsing through options, as fast access to cash often comes at a higher cost when you don't have a stellar credit record.

Also, ask your lender whether the origination fee is charged as part of the APR or deducted from the loan amount, as it may directly impact how much cash you actually receive.

Where can I get emergency loans for bad credit?

Banks

Depending on your relationship, you can approach your current bank to check whether they would be willing to offer you an emergency loan. Bear in mind that some lenders may check your credit reports from one of the credit agencies - Equifax and Experian - even though you may have borrowed from them previously or hold your transaction account with them.

Credit unions

You can borrow an emergency loan for bad credit from your credit union account. Since credit unions are community-based initiatives, they are more likely to approve borrowers with poor credit. However, some credit unions may only extend loans to their members. Some may cap the maximum amount you can borrow at low amounts, such as $2,000.

Online lenders

There are several online lenders who offer emergency loans for borrowers with bad credit history. However, the interest rate charged can be higher than traditional loans from banks, and you may also have to pay hefty processing fees.

How to get an emergency loan with bad credit?

If your credit profile is holding you back from getting approved for an urgent emergency loan, here's what you can do:

Go for a secured personal loan

Opting for a secured loan is another option if you don't get approved for an unsecured emergency loan. Since such loans are provided against collateral, secured loans may be considered by some lenders for borrowers with poor credit, all lenders must still assess your ability to repay and ensure the credit is suitable. The presence of collateral minimises the risk of lending. However, if you default on payment, the lender has the right to seize your collateral.

Get a co-borrower

Getting a co-applicant on your loan who has a better credit score may improve your chances of approval for emergency loans for bad credit, though lenders must still assess both applicants' ability to repay. A co-signer acts as a co-borrower who has an obligation to repay the loan in case you default or miss paying the repayment. The creditworthiness of the co-borrower minimises the risk of lending to lenders.

Alternatives to emergency loans with bad credit

'I need an emergency loan but cannot get approved because of my poor credit report' – if this sounds like you, here are some alternatives to consider:

• Payment plans: If you cannot pay off a current expense since you don't have emergency cash, check whether the vendor is willing to offer a payment plan. Paying in instalments can make it easier to pay your debt without making it too expensive.

• Dip into your savings: If you need a small amount of money, consider using your savings. Although it may not be ideal, your savings can help you get through rainy days. You can always replenish the amount you are borrowing from your savings account to stay on track with your finances.

• Ask for an advance payment: Check whether your employer would be willing to extend a loan against your salary. You can agree on an instalment payment plan and pay off a portion of the loan every month. Since your employer won't run credit checks to approve your application, you can keep your credit profile intact and work towards improving it so that you can later apply for a loan from elsewhere.

Conclusion

Applying for fast emergency loans for bad credit is always an option when you urgently need liquidity but cannot access traditional financing on account of your credit report. Having said that, improving your credit profile may help to improve your chances of getting approved in the future when you apply for bigger loans, such as a mortgage or a car loan.

Sign up with ClearScore for your free credit score check – this is general information only, and outcomes depend on individual circumstances. Consider seeking personal financial advice. This information does not take into account your objectives, financial situation or needs. ClearScore is not a financial adviser and does not provide personal financial advice. Before applying for any loan, compare options carefully and ensure you can afford the repayments.

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