Emergency Loan

Emergency Loans

In life, despite our best efforts in budgeting and saving responsibly, emergencies can arise that can throw off the best-laid (financial) plans. Your car may break down, you may need emergency medical treatment, you might be short on tuition money, or your home may be damaged during a natural disaster. While unpleasant to think about, these are all real situations that may arise and where an emergency loan can save the day. In Canada, approximately 19% of people have said they plan to access an emergency loan in 2021, with a further 17% stating that it is possible.

Emergency Loan

Emergency loan approval (or rejection) is usually instant. Funds are available in your bank account within 24 hours, and you repay the debt via monthly payments. These loans are meant explicitly for real emergencies, meaning they are very short-term and can often carry a high-interest rate. The best resources for an emergency loan are your primary bank, credit union, or other financial institution, although other lenders provide such borrowing opportunities.

However, to minimize your need for an emergency loan, building a robust personal finance plan is important. Any proper financial plan includes channeling some of your monthly earnings into an emergency fund. Whether you have this segregated as a separate bank account, or you’re just putting cash in a jar, your emergency fund is meant to help cover emergencies, such as paying your insurance deductible after a car accident, repairing a tooth that isn’t covered by your health plan, clearing your basement of flooding after a major storm, or fixing a leak in your roof. You don’t necessarily need to have thousands of dollars in this fund. But, if you do some research on common life emergencies, you can determine an average amount that you should have on-hand at all times.

For example, the average car insurance deductible is $500, the average dental crown is $900, and fixing a small leak in your roof could cost as much as $1,500. Though you should always strive to have the maximum amount in your account (in this case, $1,500), the average amount would be (500+900+1500)/3 = $966. This means that you have enough to cover off the first two identified emergencies, and you’re well within the range of being able to pay for the last emergency as well.

Now you have $966 in your emergency fund. How do you get the rest? The answer is an emergency loan, which is usually an unsecured personal or signature loan. If you are dealing with an emergency and have less-than-perfect credit but have a small emergency fund, it is very likely that any bank, credit union, online lender, Peer-to-Peer (P2P) lender, or other financial institution will take the chance on lending the remaining amount to you – especially if you’re able to cover more than two-thirds of the amount with your own cash. Your savings show lenders your financial maturity and prudence in budgeting. Most loan providers will view this favourably and help ensure that your emergency doesn’t become a catastrophe.

Emergency Piggy

In most cases, emergency loans can be approved and funded within the same day or within 24 to 48 hours. The loan application process is the same as any unsecured loan: You will need to provide information such as your full name, identification, verification of your residential address, your date of birth, your Social Insurance Number (SIN), and information about your employment and income. You will also most likely be asked details regarding your current debt and monthly mortgage or rent obligations. This information is used to check your credit record and score as well as determine your debt-to-income ratio, which provides lenders with visibility on how financially capable you are of taking on new debt. Most financial institutions now have online applications, meaning that you can complete all of the application requirements without stepping foot in the bank and be provisionally approved for the loan prior to handing over your verification documents. This process saves you and the bank time. Once you are approved, it’s just a matter of sending in your pay stubs or T4 slips, along with photo identification, a utility bill (as proof of address), and possibly a scan of your SIN card (though you may not need to send this in if you’re taking out the loan from your primary bank). If all your documents are in order, it is very possible that the lender will immediately issue you a cheque or deposit the funds in your bank account.

Emergency loans generally have a fixed term and interest rate. The Annual Percentage Rate (APR) that you pay will likely be determined by your credit score, the amount you’re borrowing, and your debt-to-income ratio. Conventional banks and credit unions will offer the most competitive APR, fee structure, and terms. The term could be as little as a couple of months up to multiple years. Online and P2P lenders will be less competitive because they have less strict application requirements, including allowing you to apply for a loan with average or even bad credit. This means they have to compensate themselves for the added risk by lending at a higher interest rate. Be sure to shop around for the loan that is right for you, and if possible, negotiate rates with lenders to get the most favourable terms. It is also important to find a loan that doesn’t have prepayment penalties. Some lenders charge you a one-time lump sum fee if you pay part or all of the balance ahead of schedule. Though this doesn’t make sense intuitively, it is one way that lenders can make money off their loan even if you don’t hold the loan for the full term. Carefully read the loan agreement’s fine print so you know what to expect.

Your monthly installment payment on the loan is usually directly debited from your savings or chequing account via direct deposit. This is a preauthorization for the lender to take the required payment amount from your account without you having to manually make the payment online, write a cheque, or otherwise. You probably make direct debit payments on other bills such as utilities, so you may already know how the system works. This is the best option for making payments on the loan, given that you won’t be late as long as your account has enough funds in it to cover the withdrawal.

credit tips!

Emergency loans should only be taken out if you or your family face dire circumstances entirely outside your control. An emergency loan is still debt, meaning it has to be paid back. So, even if you have no choice but to take out the loan, you should do so with caution as you will be responsible for repaying the loan just like any other unsecured loan. The best thing you and your family can do is plan for as many types of contingencies as possible. Having cash in the bank will either help you cover the expenses associated with an emergency, or at least give you upfront funds to offset or start paying down any borrowed amount. As previously noted, if you show financial maturity by establishing and building an emergency fund, financial institutions will always look at this favourably and will likely help you offset any additional emergency costs – even if you have a weak credit record or score. Do not misrepresent your situation in an attempt to take out an emergency loan for other reasons. These are vetted lending facilities, and any falsehoods could be grounds for disciplinary or even legal action by your financial institution.

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