Financial emergencies come and go, but you aren’t always in the right place to handle them on your own.
That’s when borrowing money comes in handy. A loan or line of credit gives your budget a convenient boost when you’re in a bind, so you can take care of urgent bills without delay.
There’s just one thing standing in your way.
With so many loans available nowadays, you may not know which one you should use for your unique emergency. Unfortunately, making the wrong decision could lead to steep consequences, like overpaying for your loan or negatively impacting your credit if you can’t afford it.
So what can you do to avoid these mistakes and improve your chances of landing on the best fit for your needs? Here are three personal loans and three business loans that might solve your financial problems to help answer this question.
3 Personal Loans to Help in a Personal Emergency
1. Payday Loans
A payday loan is an emergency option when you need a small boost to help cover an unexpected emergency expense. It goes by a couple of other names, so you may have seen it labelled as a direct lender payday loan or a cash advance.
Whatever you call it, it may be an option if you have bad credit. While direct payday lenders may still check your credit as part of their application process, they look at other financial information to determine your creditworthiness.
To most other lenders, however, bad credit suggests you’ve hit some speedbumps on the financial highway of life. They’ll assume these troubles will follow you when you take out a new loan, so they may deny you until you can bring up your score.
For direct payday lenders, they’re willing to overlook what bad credit suggests about your bill-paying abilities — but for a fee. Broadly speaking, payday loans have a high APR, some going as high as 500%.
How Does it Work?
A payday loan is a closed-end financial product, which means three broad things:
- You receive your loan amount in one lump sum.
- When you repay the last penny you owe, the account closes.
- If you need more money after you receive your funds, you have to reapply for another loan.
A payday loan gets its name because of its relatively quick repayment terms. Most direct payday lenders expect you to repay what you owe (principal plus interest and fees) in one lump sum by your next payday.
2. Installment Loans
Installment loans make up a diverse family of personal loans with drastically different rates, terms, and uses. Here are some of the most popular installment loans today:
- Student Loans
- Auto or Title Loans
- Installment Personal Loans
When it comes to an unexpected emergency, personal loans fit the bill. While the others play different roles in your finances — mortgages help you afford the steep price of a house, while student loans send you to college — they have certain traits in common.
What Do All Installment Loans Have in Common?
- You receive your funds in one lump-sum.
- Your repayments divvy up what you owe so that you pay back your loan (and its fees) over several weeks, months, or even years.
- Payments tend to be due on a regular schedule, whether it’s weekly, bi-weekly, monthly, or something else
- They’re closed-end financial products, meaning your final payment closes the account.
Their rates and terms depend drastically on the type of installment loan you use, your lender, credit score, and even your location.
3. Line of Credit Loans
A line of credit takes a hard, left turn from the previous two examples, as it’s an open-ended financial product. This means you’re given a pre-determined credit limit when you’re approved rather than a loan amount.
What’s the significance of this difference? You won’t be given all your funds upfront. Instead, you’ll withdraw funds from your limit as you need them — whether that’s all at once or in drips and drabs.
You’ll only start to accrue interest once you put purchases on credit, not your entire limit, and you’ll only have to repay the portion of your limit you use (plus interest and fees).
Once you make a full payment, your account stays open, which means you can withdraw up to your limit again on a revolving basis.
3 Business Loans to Help in a Professional Emergency
1. Business Term Loan
The term loan is the professional equivalent of an installment loan. This means that you’ll receive your funds in one lump sum, and you’ll repay it (plus interest and fees) over multiple scheduled payments.
Unlike personal installment loans designed for emergencies, business term loans tend to grant larger sums of money exceeding $10,000. Their repayment terms also tend to be longer to suit these higher loan amounts.
2. Equipment Leasing Financing
While the previous example is a multi-purpose loan that can help with a variety of business emergencies, equipment financing is a type of loan designed specifically to help you afford essential tools, devices, and other physical assets.
Its rates and terms hinge on the type of equipment you’re leasing, but generally, your financing will last as long as the asset’s projected lifespan.
3. A Business Credit Card
This one you’re probably already familiar with, as most Americans have four personal credit cards sitting in their wallets. The only distinction here is that your business credit card is for business expenses only.
Although it may be easy to pull this card out when you’re at the grocery store, keep your hands off the plastic when it comes to personal expenses. Reserve your limit for unexpected business expenses when your on-hand cash falls short.
A credit card is better suited for simplifying cash flow and other smaller, more frequent purchases, as they tend to have a lower limit than term loans. And, like the personal line of credit, it’s a revolving, open-ended product.
Your limit represents the maximum amount of funds you may withdraw at one time, and you may withdraw up to this limit again as long as you make your payments against your balance.
What Will You Choose?
If something here has sparked your interest, take a deeper look at the product in question. This way, you’ll get a good idea of the rates and terms available with this option.
Only then will you know if what you’ve found is a realistic option for your emergency, whatever it may be. Taking the time now do all this research will pay off when you find the best fit for your professional or personal finances.